Alternatively, the required distributions could go to fund a client’s favorite charity, said Megan Slatter, a wealth advisor at Crewe Advisors in Salt Lake City. Charitable donations made directly from an IRA are called qualified charitable distributions (QCDs)—and such distributions do not count as taxable income, which the distribution otherwise would. An individual can donate up to $100,000 a year this way (but cannot also claim a charitable contributions deduction on that donation to reduce taxable income).
“QCDs are a wonderful strategy to further your philanthropic goals, satisfy your annual RMD requirement, and reduce your tax liability,” said Slatter. “The donation check must be issued directly from your IRA custodian to the qualified charity to satisfy all or part of someone’s annual RMD requirements.”
Balancing RMDs With Careful Tax Planning
When you use careful tax planning, your required minimum distributions can be used in conjunction with tax-loss harvesting strategies elsewhere.
Melissa Ciotoli, a managing director and senior wealth advisor at GYL Financial Synergies in Westport, Conn., said she’s been using tax-loss harvesting for clients’ taxable accounts. This involves selling underperforming or money-losing assets, which are considered capital losses. These losses offset taxable capital gains from other asset sales—and in some cases can even reduce ordinary personal income taxes.
“Up to $3,000 of capital losses that are not otherwise offset by capital gains can be used against ordinary income each year,” said Ciotoli, “so that can help many people.”
Selling Assets That Aren’t Market-Based
Still other advisors recommend taking required minimum distributions from assets other than stocks—for instance, real estate that’s owned within a retirement account.
But this can get tricky. You must consider whether the property throws off enough rent to fund the RMD. If not, you may have to sell the property to generate sufficient cash.
“It is not uncommon to find your IRA increasing in value due to property appreciation, while getting low on cash [from rental income], leaving you unable to pay the RMD,” said Slatter.
An Opportunity To Rebalance
The regulations for required minimum distributions can be complicated and maddening. But there is some leeway. “If you have multiple IRAs, you can satisfy your total RMD from one IRA or a combination of IRAs,” said Slatter, adding that this is not the case for 401(k)s or other qualified retirement plans, only IRAs.
Given that flexibility, the required distributions may be a good reason for you to assess and tweak your portfolio. “Use this as an opportunity to sell overweight investments or asset classes to rebalance your overall investment allocation,” she said.