What to Do with IRA Distributions You Don’t Spend

Mar 7, 2018

Welcome to age 70. Believe me, you don’t look a day over 69.

If you’re not quite to age 70, don’t worry…its coming sooner than you think!

What happens at age 70…or 70 ½ to be precise?

That’s the age Uncle Sam says you must begin taking a required minimum distribution (RMD) each year out of your IRA. And if you don’t do it, you’ll owe a 50% penalty on every dime you fail to withdraw on time, plus the taxes due. I’m not kidding – they are serious about this stuff!

Obviously the most popular thing to do with money one gets—from any source—is to spend it. But what if you don’t need or want to spend it?

What are your other options?

1. Save it. Here you take your RMD to the bank, credit union, savings and loan or other depository institution and warehouse the money for later. I would suggest you keep an amount equal to six months to a year’s worth of spending there.

2. Protect it. Do you have long-term care insurance? If not, you might consider using your RMDs to purchase long-term care insurance. A nursing home can cost $5,000 or more a month, depending on the level of care required. This can drain your assets quickly if they are not protected.

3. Invest it. Once you have your savings and protection bases covered, you might consider opening a non-IRA investment account. You could simply take your annual RMDs and deposit them into your non-IRA investment account. Don’t do this with money you are planning to spend anytime soon. This is money you are hoping will grow over the long-term. But you must also recognize it has market risk involved.

4. Give it. You know you can’t take it with you and most of us are not aiming to die broke. So we know we’ll likely leave some money behind. Maybe a lot. Perhaps you are the kind of person who would enjoy seeing the good done now with money otherwise left behind. Roman parents used to give their inheritance to their children before they died so they could train them how to manage and use their newfound resources. That’s not such a bad idea.

5. Multiply it. If you think you’re going to leave a significant amount in your IRA to your heirs, you might consider taking the RMDs and buying life insurance on yourself. If you are a reasonably healthy 70 year old, the premium ought to be more than enough to buy insurance to cover any taxes your heirs would have to pay on the IRA at your death. It might even buy substantially more.

You put money away for retirement assuming you would use it one day.

If you’re not spending it, make a wise choice now about how to use your own RMDs to maximize the impact of your IRA.