If I don’t take out all of my required minimum distribution (RMD) each year, can I put some of it back into my stocks? If so, will I pay tax on the amount returned? Does this count as double taxation? If I am only taxed on the additional interest that this money generates when I reinvest it, how can this interest be calculated and tracked? Also, would this additional income be better spent on other investments such as real estate, considering that you can write off expenses?
– Karen
You can use your RMD money however you want, including reinvesting it in stocks. Then it will behave like any other non-retirement investments you have. The RMD itself is not taxed again, so there is no double taxation. But the new investments will be taxed if they generate any income.
Each year, you will receive a 1099 for any interest or dividends received on securities or securities sold. If you choose to invest directly in rental real estate, you will be taxed on any rental income that exceeds expenses. Other real estate investment options are taxed more like regular securities than outright ownership of rental properties.
Consulting with a financial advisor can help determine which investments will work best with your existing investments and retirement accounts. Connect with a trusted advisor.
Required minimum distributions (RMDs) are mandatory payments taken from pre-tax retirement accounts.
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RMDs If you need or want the money, you should withdraw it from pre-tax retirement accounts. Since that money has not yet been taxed, the IRS wants to make sure that the withdrawal was taken and that the money was ultimately taxed.
But what you do with your RMD money is entirely up to you. Among the many options for that money, you can:
Use it to pay regular expenses
Invest it
Contribute to a Roth IRA (if you have enough income)
There are no restrictions on what you can do with your RMD after you take it, as long as you take the required amount. (But if you need help planning and managing your RMDs, Connect with a financial advisor and see how they help.)
Investing your RMD can be a great way to put your money to work for you. Before deciding how to invest, review your entire portfolio to determine the best way to add value to your current holdings. You’ll also want to consider how soon you want to use that money—your time horizon—which can affect your investment choices.
Stocks offer growth opportunities, especially in the long term. Many corporations pay dividends to their shareholders on a regular basis, which increases your current income stream or can be reinvested. You can invest in stocks directly or through mutual funds or exchange-traded funds (ETFs). (A Financial advisor It can help you evaluate different investments and choose the right one for your situation.)
Real estate can be a profitable investment, and it can be done in many ways. In addition to buying properties to rent or flip, you can also invest in real estate investment trusts (REITS), real estate funds, or distressed real estate.
REITs They are similar to mutual funds and ETFs but hold dozens or hundreds of rental properties or mortgages, providing a diversified real estate portfolio with each share.
Real estate mutual funds, or ETFs, hold a variety of REITs and possibly other real estate-focused securities (such as construction industry stocks).
spend a lot of money It raises money from many investors to fund real estate projects or buy private real estate investments that would otherwise be out of reach for most investors.
REITs, real estate funds and crowdfunding offer the opportunity to invest in real estate with minimal cash outlay, making it a more flexible financing choice.
A retiree works with her financial advisor on a plan to reinvest her RMD earnings.
Investments are taxed only when you make money from them. The form these earnings take depends on the type of investment. For example, shares can be issued Dividend incomeBonds generate interest income and rental properties generate rental income. In addition to those ongoing earnings, investments are also taxed when you sell them for a profit.
When you buy any investment, the total amount you pay for that investment is considered your basis. The basis is used to calculate any gain or loss when the investment is eventually sold. That means you don’t pay taxes on the amount you invest, just the extra money you receive when you sell it.
For example, if you buy some stock for $10,000 and later sell it for $12,000, you only pay on the $2,000 profit. (If you need help planning around taxes on investments, contact A Financial advisor.)
Investing in rental properties offers a unique opportunity to generate positive cash flow and tax losses. That’s because of the various expense breaks that rental properties offer. Landlords can deduct expenses directly related to the property against the costs of running this business.
Common real estate tax breaks include:
Mortgage interest
Property insurance
Property tax
Management fees
Maintenance and repair
Notice to tenants
Legal fees
Accounting fees
Along with these cash expenses, rental properties are also subject. Price reduction. This allows you to deduct a portion of the property each year, which increases the write-off fee. These expenses offset the rents collected and reduce the taxable income generated by the investment. (If you want to invest in rental properties, a financial advisor can help you plan to do so.)
Bottom line: Reinvesting your RMD can provide additional growth and income in retirement. Reviewing your portfolio, especially with input from a trusted financial advisor, can help you determine which types of investments are right for your situation.
If you need help Finding and choosing a financial advisorStart by assessing your needs and goals. Maybe you’re looking for help choosing or managing investments. Restricted stock units (RSUs) that your company gives them. Or maybe you’re looking for comprehensive financial planning services. Assessing your needs and objectives will help you decide what services the consultant you hire should provide.
Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool It matches you with vetted financial advisors serving your area, and you can make a free introductory call with your advisor matches to determine which one you feel is right for you. If you’re ready to find an advisor to help you achieve your financial goals, Start now.
Keep an emergency fund handy in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t exposed to high volatility, like the stock market. The trade-off is because the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
Are you looking for a financial advisor to grow your business? SmartAsset AMP helps advisors connect with leads and offers marketing automation solutions so they can spend more time converting. Learn more about SmartAsset AMP.
Michelle Kagan, CPA, is a financial planning columnist for SmartAsset and answers reader questions on personal finance and tax topics. Have a question you want answered? Email AskAnAdvisor@smartasset.com and your A question may be answered in a future column. Questions can be edited for length and clarity.
Please note that Michelle is not a participant in the SmartAsset AMP platform or an employee of SmartAsset. She was compensated for this article.
