How to Invest Your IRA Distributions

An investment retirement account is an investment vehicle that has a favorable tax structure, deferring taxes until the money is distributed. Tax-deferred earnings help you accumulate more money faster. It also prevents taxes on capital gains from your investments annually. If you don't need the money, you may want to leave the money in the IRA until you are required to take a distribution after age 70 1/2. At this time, the Internal Revenue Service mandates a required minimum distribution (RMD) that must be pulled out to avoid a penalty. If you don't need the money, reinvesting it is your best option.

Determine what your RMD will be. The amount is based on your age or your spouses age. The IRS has a table in Publication 590 to help you factor the amount at Estimate that the RMD will be around 10% of the IRA value.

Fill out and submit a distribution form with your IRA custodian. You can make an appointment to see your financial advisor or call the custodian and have a form mailed to you. Be sure to let them know this is your RMD distribution as some custodians have a special form for this. Only withdraw what you are required to. This will minimize the amount added to your adjusted gross income and the taxes you will pay. You will have the option to have taxes withheld on the distribution so you don't have to worry about it later.

Wait for the check. In the meantime, examine your investment options. Many people take the distribution and place it in their savings account. Others will add it to their equity portfolio. There are no restrictions on what you can do with the money. But if you truly don't need the distribution and have enough saved and invested in other accounts that are taxable annually, you may want to consider another tax-deferred or tax-free vehicle.

Municipal bonds and treasury bonds are tax-free investments that offer better interest yields than bank accounts in most cases. Note that tax-free mutual funds may still have tax consequences if the manager is buying and selling bonds within the portfolio.

Ask your financial advisor about a variable annuity if you are looking for a more aggressive mutual fund investment. These work the same as an IRA where the assets grow tax-deferred. You are not required to take distributions out until a much later date (often near age 100). The principal gets no deduction but that also means it won't be taxed again when you pull it out.

Review your life insurance situation. If you are considering how your assets will transfer to your heirs, using your RMD to fund a life insurance policy may be the best scenario. Life insurance passes to heirs tax-free and is a solid vehicle to help pay estate transfer taxes upon your death. Many policies have long-term care riders that would help prevent an erosion of your estate if you required long-term care. If you really don't think you will need the money and want to plan for your children and grandchildren, you may want to increase or start a life insurance policy using the RMD amounts for your premiums.


  • Since there are no restrictions on what you can do with the RMD money, you can spend it or invest it in any fashion you choose. Keep in mind that the choices you make can increase or decrease your tax bill each year. Consult a tax advisor or financial planner to see what is best for your situation.