Q&A: What to Do With Your Required Minimum Distribution

Your choices depend on your goals.

couple with financial planner

Question: I’m 70 years old and will need to take my first required minimum distribution soon. I don’t need the money — at least I don’t foresee needing it — so I’m looking at it as money that will go to my children, who are in their 30s and 40s. My first thought was to invest it in growth stocks for them, but that could push me into a higher tax bracket and increase my overall tax liability. Which is the wiser course — trying to minimize my taxes or investing for the kids in the way that’s best for them?

Ric: The key with a required minimum distribution is to focus on your goal. You said your intention is to leave it for your children — and presumably that’s far down the road. If that’s your objective, then yes, the money should probably be invested for growth. But that doesn’t mean you can’t be diversified; you can own a diversified portfolio that still leans toward growth.

Also, I’m not sure I understand your comment about taxes. Investing for growth doesn’t have to create an adverse tax issue.

Some people might say that, if you’re 70 with more money than you need, you should invest the money conservatively to make sure it will be there for the kids. But think of it this way: Since you say you won’t need the money and plan to leave it to your kids, we could argue that the money really isn’t yours; instead, it’s theirs.

You’re merely the steward of the money, a caretaker serving on their behalf. And that means, as you said, you should invest it with their goals in mind. And based on their ages, a growth investment strategy makes sense.

But you aren’t certain that you won’t ever need the money. Therefore, we’d want to conduct an analysis to test your assumption that you won’t ever need income from this money. Only if there is no doubt would we want to proceed as you’ve suggested.

Another option for you to consider: Give some or all of the money to them now. Your life expectancy is 20 years or more. Why force young people who are 35 to wait for their inheritance? I bet they could use the money now more than they’ll need it later.

If you were to pass $10,000 or $20,000 to a child now, it might be of huge benefit to them in buying a home, paying for college, buying a car or eliminating a debt. That’s why the estate planning conversation about distribution of assets should often begin sooner than many would think.

The old-school method was that people received inheritances after someone died. The patriarch died at 60, when the kids were in their 40s, but people are living much longer today, so a different approach is worth consideration.

So we’d recommend a twofold approach for you. First, let’s confirm your assumptions, and if they’re correct, let’s consider an adjustment to the estate planning strategy for the true benefit of the entire family. This is a smart way to handle your required minimum distribution.

This material was prepared for informational and/or educational purposes only. Neither Financial Engines Advisors L.L.C (also referred to as Edelman Financial Engines) nor its affiliates offer tax or legal advice. Be sure to consult with a qualified tax or legal professional regarding the best options for your particular circumstances.

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