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If you don't need the cash, reinvest 401(k) distributions

When you're older than 70½, you must take

When you're older than 70½, you must take taxable distributions from your retirement accounts even if you don't need them. Credit: iStock

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I'll soon have to take a required minimum distribution from my 401(k) account. My regular savings, pension and Social Security more than cover my living expenses. I'd like to reinvest the RMD, but don't know where. Do you have any suggestions?


This is a good problem to have — and it's not an uncommon problem among retirees who have modest expenses and substantial nest eggs.

Everyone is required to start taking annual required minimum distributions (commonly referred to as RMDs) after age 70½. (One exception: If you're still working, you generally don't have to take an RMD from your current employer's 401(k).) But younger people don't always realize that your RMD increases every year. At age 70½, it represents 3.64 percent of your tax-deferred retirement account balances. At 73, it's just over 4 percent. By age 85, it's 6.8 percent. The upshot is that retirees whose living expenses are comfortably covered by their Social Security and pension income can find themselves required to take — and pay taxes on — larger annual retirement account distributions than they need.

You're not required to spend these distributions, however. If you can, it's wise to reinvest your RMDs in a taxable account (or in a Roth IRA, if you're eligible). You don't necessarily need a new investment, says Ray Mignone, a Great Neck financial planner. "You're just moving the money from one pocket to another. If you're comfortable with your 401(k) investment, you can invest the RMD the same way in a taxable account." Indeed, most mutual funds available in 401(k) plans are also available outside them.

THE BOTTOM LINE When you're older than 70½, you must take taxable distributions from your retirement accounts even if you don't need them.


NEXT WEEK How you can use your RMDs to rebalance your portfolio or to increase its diversification

TO ASK THE EXPERT Send questions to Ask the Expert/Act 2, Newsday Newsroom, 235 Pinelawn Rd., Melville, NY 11747-4226, or email Include your name, address and phone number. Questions can be answered only in this column. Advice is offered as general guidance. Check with your own advisers for your specific needs.

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