One of the catches when you use a tax-advantaged retirement account like a 401(k) or an IRA is that once you hit a certain age, you have to start taking a minimum amount of money out each year – to stop people from protecting the money from taxes for too long. Some may wonder, though, if they can simply reinvest that money immediately. The answer is that yes, you can put the money you take out in required minimum distributions back in the market right away – so long as you don’t use another tax-advantaged account. For more help with retirement investments, consider working with a financial advisor.
What Is A Required Minimum Distribution?
As the IRS puts it, “You cannot keep retirement funds in your account indefinitely.” The required minimum distribution addresses that issue.
When you have a tax-advantaged retirement account, like a 401(k) or an IRA, the IRS requires you to begin making withdrawals once you reach the maximum age. That age is:
72 years old if you turn or turned 70 after June 1, 2019;
70.5 (that is, six months after you turn 70) if you turned 70 before June 1, 2019.
After this age, you must begin making what the IRS calls “required minimum distributions,” or RMDs. This is the minimum amount that you must withdraw from your retirement account each year or else you risk facing tax penalties. You can withdraw more than this amount if you would like, but you may not withdraw less.
The reason for this is that your withdrawals are included in your taxable income. Tax-advantaged retirement accounts allow you to defer paying taxes on certain portions of your income until retirement, but eventually the IRS would like to get this money. Minimum distributions ensure that you begin paying taxes on your retirement account eventually. Per the IRS’s website, required minimum distributions apply to the following accounts:
Required minimum distributions do not apply to Roth IRAs. This is the only significant tax-advantaged retirement account that is omitted from this requirement. You do not have to pay taxes here because you have already paid taxes on the money you invested, so the IRS does not have anything unpaid to collect from you.
How Much Are Required Minimum Distributions?
Your required minimum distribution changes from household to household and year to year. As the IRS describes it: “The required minimum distribution for any year is the account balance as of the end of the immediately preceding calendar year divided by a distribution period from the IRS’s ‘Uniform Lifetime Table.’ A separate table is used if the sole beneficiary is the owner’s spouse who is 10 or more years younger than the owner.”
This is less complicated than it seems. Basically, you follow three steps:
Find your account balance as of Dec. 31 in the preceding year;
Find your applicable distribution factor, generally it’s age-based and goes down as you get older; and
Divide your account balance by your distribution factor.
Here is the chart for determining your distribution factor (keep in mind that if you turned 70 after June 1, 2019, you don’t have to take an RMD until age 72:
IRA Required Minimum Distributions Age Distribution Period 70 27.4 71 26.5 72 25.6 73 24.7 74 23.8 75 22.9 76 22.0 77 21.2 78 20.3 79 19.5 80 18.7 81 17.9 82 17.1 83 16.3 84 15.5 85 14.8 86 14.1 87 13.4 88 12.7 89 12.0 90 11.4 91 10.8 92 10.2 93 9.6 94 9.1 95 8.6 96 8.1 97 7.6 98 7.1 99 6.7 100 6.3 101 5.9 102 5.5 103 5.2 104 4.9 105 4.5 106 4.2 107 3.9 108 3.7 109 3.4 110 3.1 111 2.9 112 2.6 113 2.4 114 2.1 115 and over 1.9
So, for example, say you have $500,000 in your retirement account as of Dec. 31 and, per the Uniform Lifetime Table, have a distribution factor of 25. You would divide $500,000by 25, to get a minimum withdrawal of $20,000 in this calendar year.
Remember that required minimum distributions are calculated per account and per year. So if you have multiple retirement accounts, you must calculate your required minimum distribution for each retirement account each year.
Can You Reinvest Your Required Minimum Distribution?
You can reinvest your required minimum distribution in any account or asset that is not a tax-advantaged retirement account. So, for example, you could buy stocks, bonds, real estate or any other financial assets with your RMD. However, you could not put this money into an IRA or a 401(k). The exception to this rule is the Roth IRA. If you are eligible to put money into a Roth IRA, you can do so with required minimum distribution money. (In general, Roth IRAs are exempt from RMD rules.)
In other words, except for Roth IRAs, so long as the IRS isn’t giving you a tax break on the portfolio, feel free to reinvest.
The Bottom Line
You can reinvest a required minimum distribution so long as you don’t put the money into a tax-advantaged retirement account. Other than that, you’re free to do as you please.
Retirement Planning Tips
Long before you can take money out of your retirement account you need to start putting money in. With SmartAsset’s retirement calculator, you can see just how much money you’ll need to start saving up for that perfect retirement… whenever you plan on taking it.
A financial advisor will be able to help you make decisions about your retirement savings and withdrawals. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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