March 6, 2018 / 5:52 PM / 5 months ago

YOUR MONEY-Creative ways to spend your required IRA distributions

NEW YORK, March 6 (Reuters) - Half-birthdays usually do not count for much, but one that really matters happens at age 70-1/2.

That is when the U.S. government requires you to start taking money from certain retirement accounts or face stiff penalties - 50 percent of the amount you were supposed to have withdrawn based on the Internal Revenue Service’s actuarial formula. More than 600,000 people missed the deadline in 2012, according to the last audit from the Treasury Inspector General for Tax Administration.

If the money in your IRA or 401(k) is what you have to spend for the rest of your life, required minimum distributions (RMDs) are no big deal, you will probably take much more. The required minimum size of the withdrawal, which is derived from your life expectancy and the size of your account, is just under 4 percent to start.

Fidelity, one of the largest retirement account holders, says the average annual IRA distribution taken by its customers is about $12,000. Combined with the typical Social Security benefit of $32,000 a year, that is a modest budget.

But if you have other money making up the bulk of your nest egg from a pension or other savings - or maybe you are still working - you might have trouble conceptualizing what to do with the money the government requires you to take from retirement savings.

What makes the process even more tricky is that you will owe taxes on the distributions. And beyond just adding to your income, the amount could push you into a higher tax bracket. It could also affect the taxable portion of Social Security and Medicare and Medicaid benefits.

SPENDING PLANS

Most people who take retirement distributions just roll the money into another bank or brokerage account, said Maura Cassidy, vice president of retirement products at Fidelity.

Danielle Howard, a certified financial planner in Basalt, Colorado, has a client who uses distribution money every year to pay his property taxes. Larry Ginsburg, a financial adviser in Oakland, California, has one client who takes his whole family on a trip every year.

At first, Ginsburg’s client was a reluctant spender and wanted to just keep rolling the money back into savings. But, after he used the funds for travel, he told Ginsburg: “That’s probably the best thing you ever did for me.”

For Monica Sehnert, who is now 71, the RMD process has been about figuring out how to give the money away, because her teacher’s pension and other savings cover her living expenses.

“When you get a little older, you start thinking about all these heavy duty things, about what lies beyond,” said Sehnert, from Huntington Beach, California.

There is a tax benefit to giving to charity directly from an IRA, too. If you take your money as a Qualified Charitable Deduction and give the money directly to the charity and file the correct forms, you do not have to count the money as income on your taxes.

Given that most people will not itemize deductions under the new tax laws, this will provide a tax benefit to giving money away.

INHERITED RMDs

Not everyone who has to take required distributions is over 70: The rules apply to those who have inherited IRAs as well. The distribution amounts are generally much smaller, because of the longer life expectancy for a younger person and the formula being adjusted for age.

One of Danielle Howard’s clients inherited an account after his mother died when he was in his 20s. The yearly draw was $1,300 at first. She convinced him to pay the tax and put the money into a Roth IRA for himself, so the proceeds would grow tax-free.

Financial adviser Mark Wilson, usually a saver, uses his RMD from an inherited account to take his family out to a couple fancy dinners every year where he toasts his late father.

The $25,000 he was left 17 years ago has now almost doubled - and Wilson’s family has made plenty of memories.

“I feel my father smiling away,” Wilson said. (Editing by Lauren Young and Frances Kerry)

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