Here’s What to Do with Extra Cash from Your IRA

August 17, 2016 — 6:00 AM EDT

When you have extra cash from your IRA after taking a required minimum distribution (RMD), you may be wondering what to do with it. A Vanguard report suggests that while retirees are taking RMDs as scheduled, they’re not necessarily spending the money. In fact, 66% of wealthy households are spending less than 3% of the cash they’re required to withdraw from their IRAs.

If you think you’ll have enough money in retirement to make spending RMDs a moot point, here are some suggestions for how to put the money to work. (For more, see Traditional IRAs.)

​Invest Extra Cash From Your IRA Elsewhere

Putting any surplus funds from a required distribution into a savings account is one option, but it’s not likely to yield impressive returns. Reinvesting the money is the better bet if you hope to continue growing your nest egg.

So where’s the best place to put it? Buying up real estate is one option, but becoming a landlord or a house flipper may not be what you had in mind for your retirement. A taxable investment account is another alternative that’s not as time intensive.

With a taxable account you have the opportunity to invest in stocks, mutual funds or bonds, all of which can potentially strengthen your bottom line. The most important thing you need to look out for, however, is the possibility of increasing your tax liability. When you sell investments in a taxable account at a profit, that triggers the capital gains tax. Short-term capital gains tax applies when you sell investments you’ve held for less than a year. Gains are taxed at your ordinary income tax rate. Long-term capital gains tax, on the other hand, tops out at 15% for most investors. Certain high-income households may see the rate climb to 20%. (For more, see Capital Gains Tax 101.) 

If you’re going to invest extra cash from an IRA into a taxable account, managing your tax liability is a must. Looking for investments that you plan to buy and hold for longer than a year is a start. Consider this example: Let’s say you’re married with an annual income of $75,000, and you invest $20,000 from an RMD in a taxable account. If you were to sell your investment at a value of $25,000 13 months later, you’d owe $288 in capital gains tax. If, however, you sell before hitting that one-year mark, your capital gains tax bill would climb to $1,038. That’s a good reason to evaluate your strategy for investing RMD money carefully. (For more, see What You Need to Know About Capital Gains and Taxes.)

Use Tax-Loss Harvesting to Your Advantage

If you decide to go the taxable account route, tax-loss harvesting can take some of the sting out of taxes. Tax-loss harvesting involves selling off losing assets in your portfolio and replacing them with different ones. The idea is that losses can be used to offset gains at tax time, so you don’t end up owing as much money to Uncle Sam.

One thing you need to be mindful of, however, is violating the wash-sale rule. This rule says that when you’re selling investments to harvest losses, you can’t replace them with ones that are “substantially identical” within 30 days of the initial sale. If you do that, the IRS won’t allow you to harvest the loss, so it pays to be mindful of what you’re reinvesting in.

Exchange-traded funds (ETFs) can be a good way to get around the rule, as long as the fund you’re choosing tracks a different index than the one you were invested in previously. (For more, see A Complete Guide to Tax Loss Harvesting With ETFs.) 

Get a Tax Break When You Donate to a Good Cause

Tax-loss harvesting and timing the sale of your investments carefully can trim your tax bill, but you shouldn’t count on it being eliminated entirely. Using some of your required distribution funds to make a charitable donation can also work in your favor for lowering your tax liability.

Under the current IRS rules, qualified charitable donations made with funds from an RMD are not counted toward your income for tax purposes. You can contribute up to $100,000 per year, per taxpayer, without incurring taxes on the money. The charity has to meet IRS eligibility rules, and the RMD check has to be made out to the charity, not to the person who owns the IRA. If you get a check made out to yourself and then decide to donate it to charity, you wouldn’t get the same tax benefit. 

​The Bottom Line

Finding yourself with leftover cash from an IRA is a good problem to have, but only if you’re using it wisely. Fortunately, finding ways to reinvest the money while keeping the tax man at bay is tricky but doable. Investing strategically in a taxable account, donating some of the funds to charity and leveraging capital losses can all work together to help you get the most mileage possible out of the extra dough.