Ask An Advisor Can I Reinvest My RMD in Stocks or Real Estate? I Worry About Double Taxation

Ask An Advisor Can I Reinvest My RMD in Stocks or Real Estate? I Worry About Double Taxation

If I don’t spend all of the required minimum distribution (RMD) money each year, can I reinvest some of it back into my stocks? If so, will I be taxed on the amount returned? Would this be considered double taxation? If I am only taxed on the additional interest earned on that money when I reinvest it, how would that interest be calculated and tracked? Additionally, would it be better to put that extra income toward another investment, like real estate, since you can write off your expenses?

-Karen

You can use your RMD money however you want, including reinvesting it in stocks. It would then behave like any other investment other than retirement. The RMD itself would no longer be taxed, so there would be no double taxation. But if the new investments generated income, this would be taxed.

Consulting with a financial advisor can help you determine which investments would work best with your existing investments and retirement accounts. Connect with a Fiduciary Advisor.

Each year, you receive 1099s for any interest or dividends earned on securities or for information on securities sold. If you choose to invest directly in rental real estate, you would be taxed on any rental income in excess of expenses. Other real estate investment options would be taxed more like regular securities than direct ownership of rental property.

When you don’t need your RMD

Ask An Advisor Can I Reinvest My RMD in Stocks or Real Estate? I Worry About Double Taxation

Required minimum distributions (RMDs) are mandatory withdrawals made from retirement accounts on a pre-tax basis.

RMD must be withdrawn from retirement accounts on a pre-tax basis, whether you need or want to withdraw money. Since this money has not yet been taxed, the IRS wants to make sure that withdrawals are made and that the money is finally taxed.

But what you do with your RMD money is entirely up to you. Among the many options for this money, you could:

  • Use it to pay for your regular expenses

  • Invest it

  • Contribute to a Roth IRA (if you have enough earned income)

  • Donate it directly to a charity as qualified charitable distribution (QCD) and avoid RMD taxes (assuming the RMD comes from an IRA)

  • Give it to someone you love

  • Save it for a rainy day

There are no restrictions on what you do with your RMD after taking it, as long as you take the required amount. (But if you need help planning and managing your RMDs, contact a financial advisor and see how they can help you.)

Many investment options

Investing your RMD can be a great way to grow your money. Before deciding how to invest, look at your entire portfolio to determine the best way to add value to your current holdings. You’ll also need to think about when you might want to use this money – your time horizon – as this can also affect your investment choices.

Stocks offer growth opportunities, especially over the long term. Many companies regularly pay dividends to their shareholders, which would increase your current income streams or could be reinvested. You can invest in stocks directly or through mutual funds or exchange-traded funds (ETFs). (A Financial Advisor can help you evaluate different investments and choose the ones that best suit your situation.)

Real estate can also be a lucrative investment, and this can be done in several ways. In addition to purchasing properties to rent or flip, you can also invest in real estate investment trusts (REITS), real estate funds, or crowdfunded real estate.

  • REIT 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 stock.

  • Real estate mutual funds or ETFs hold a variety of REITs and possibly other real estate-focused securities (like construction industry stocks, for example).

  • Crowdfunding pools money from many investors to finance real estate projects or purchase private real estate investments that would otherwise be inaccessible to most investors.

REITs, real estate funds and crowdfunding offer the opportunity to invest in real estate with minimal cash, which can be a more flexible financial choice.

How investments are taxed

A retiree works with her financial advisor on a plan to reinvest her RMD income. A retiree works with her financial advisor on a plan to reinvest her RMD income.

A retiree works with her financial advisor on a plan to reinvest her RMD income.

Investments are only taxed when you make money from them. The form this income takes depends on the type of investment. For example, stocks can provide dividend income, bonds generate interest income and rental properties generate rental income. In addition to this ongoing income, investments will also be taxed when you sell them for profit.

When you purchase an investment, the total amount you pay for that investment is your basis. The basis is used to calculate gains or losses when the investment is ultimately sold. This means you won’t pay tax on the amount you invested, only on the extra money you receive when you sell it.

For example, if you buy shares for $10,000 and then sell them for $12,000, you will only pay tax on the $2,000 profit. (If you need help planning the taxes you’ll pay on investments, consider speaking to a Financial Advisor.)

Tax benefits of direct real estate investments

Investing in rental properties provides a unique opportunity to generate positive cash flow and tax losses. This is due to the wide variety of expense deductions rental properties offer. Owners can deduct expenses directly related to the property as well as the costs of operating that business.

Common property tax deductions include:

  • Mortgage interest

  • Home Insurance

  • Property taxes

  • Management fees

  • Repairs and maintenance

  • Advertising for tenants

  • Legal fees

  • Accounting fees

Alongside these cash-intensive expenses, rental properties are also subject to depreciation. This allows you to deduct a portion of the cost of the property each year, thereby increasing write-offs. These expenses offset the rents received and reduce the taxable income generated by the investment. (If you want to invest in rental properties, a financial advisor can help you plan this.)

Conclusion : Reinvesting your RMD can provide potential for additional growth and income in retirement. Evaluating your portfolio, especially with the advice of a trusted financial advisor, can help you determine what types of investments will be best suited to your situation.

Tips for Finding a Financial Advisor

  • If you need help find and choose a financial advisor, start by assessing your needs and goals. Maybe you need help selecting investments or managing restricted stock units (RSU) that your company has granted. Or maybe you’re looking for comprehensive financial planning services. Assessing your needs and goals can help you determine what services the advisor you hire should provide.

  • Finding a financial advisor doesn’t have to be difficult. The free SmartAsset tool connects you with up to three approved financial advisors that serve your area, and you can have a free introductory call with your advisor to decide which one seems best for you. If you are ready to find an advisor who can help you achieve your financial goals, start now.

Michele Cagan, CPA, is a financial planning columnist for SmartAsset and answers reader questions on topics related to personal finance and taxes. Do you have a question you would like answered? Email AskAnAdvisor@smartasset.com and your the question will perhaps be answered in a future column. Questions may be edited for length and clarity.

Please note that Michele does not participate in the SmartAsset AMP platform.

Photo credit: ©iStock.com/Andrii Dodonov, ©iStock.com/shapecharge

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