If you, like many potential retirees, don’t know exactly what to do with your required minimum distributions (RMDs), you’re not alone. In fact, many people struggle with determining how to handle the situation, adding undue stress to their financial situations. However, if you consider using RMDs to fund a 529 account, you can find a simple solution to your problem. Here’s just how to begin the process—and what it entails.
What are RMDs?
Before we get into the ins and out of using RMDs to fund a 529 account, let’s begin with the basics. After all, with so many different terms and definitions, it’s much easier to keep the advice straight if you actually know what it covers! Remember this rule of thumb when dealing with finances: always ask questions if you have them and don’t be afraid to learn everything you can about accounts, money, and savings.
So, with that out of the way, what exactly are RMDs? Also known as required minimum distributions, they become a big part of your life once you reach the age of 70 ½. Though you have a grace period, lasting until April 1 (after your 70 ½ birthday), once that day arrives on the calendar, you’ll need to begin taking the RMDs out of your retirement accounts. This includes savings accounts like IRAs, Keough plans, and 401(k)s. Additionally, unless you have an account that has already been taxed, you will lose a bit of money from your distribution to taxes.
What is a 529 account?
At their core, the main function of 529 plans is to fund education. Whether it’s your children, your grandchildren, or even your great-grandchildren, many people can benefit from investments in their education. Not only can a 529 account enable a cycle of success, but it can help you give your loved one more opportunities for his or her future.
Additionally, it’s important to distinguish a 529 account from a bank account. When colleges look at a student’s finances and see the money you’ve deposited into a bank account, the student is less eligible for aid. However, that problem can be solved with one simple action: using RMDs to fund a 529 account.
How do you use RMDs to fund a 529 account?
Before you begin the process, talk to your loved ones and your intended recipient or recipients. Some parents may have already covered college plans, though you can also fund grad school, law school, or medical school if the recipient is inclined to pursue further education. Additionally, if your recipient prefers to find a job that does not require further education, such as in the military or transportation industries, a 529 account may cause unwanted pressure. Besides, creating a 529 account is a big step, so even if your intended recipient agrees, you can establish expectations and engage in a dialogue before you begin depositing your RMDs in it.
After that, you’ll have to withdraw the money from your account, as is required by law. Next, do the calculations—your RMDs will be taxed. However, you can still look forward to a reprieve, as 529 accounts enjoy tax-deferred status.
Though the sudden onset of RMDs may change your finances, they can also change multiple lives—and for the better. Turn the routine withdrawal of retirement account money into a blessing, not a burden by using RMDs to fund a 529 account. Your loved ones will appreciate your kindness, and they can use the funds to empower their futures.
It may not be time for you to start taking your RMDs, but it’s certainly time for to continue or start saving for your future. With some help from the expert investors at Ty J. Young Inc., you can start growing your nest. Even better, our plan is 100 percent money-protected. Contact us at 877-912-1919 to learn more. Finally, don’t forget to keep reading our useful Retirement You Earned blog!