Tag: money-market funds

5 Smart Money Moves to Make With Your RMDs
[ad_1]

Once you begin taking required minimum distributions (RMDs) at age 73, you must withdraw a set amount each year from your pre-tax retirement accounts. If you don’t need that money for living expenses, you can still use it productively. Many retirees choose to reinvest their RMDs in a taxable brokerage account, add to emergency savings, buy income-producing investments, pay down debt, or use part of the funds for qualified charitable distributions to reduce taxable income. A financial advisor can help you decide which option supports your overall retirement plan.

Once you take your RMD, the money becomes taxable income, but you can still put it to work. After paying the taxes owed, you can reinvest the remaining funds in a regular investment account. Common options include mutual funds, exchange-traded funds (ETFs), dividend-paying stocks, or high-yield savings products. The goal of this strategy is to keep your money growing, even though it has left your retirement account.

Before reinvesting, think about how soon you may need the money. If you expect to use it within a few years, you may want safer choices such as certificates of deposit (CDs), money market funds, or short-term Treasury bonds. If you can leave the funds invested for longer, a mix of stock and bond funds can offer both income and growth potential. It’s also important to review how new investments could affect your taxes, since earnings in a taxable account may be reported each year.

Reinvesting your RMD can make sense for retirees who already have steady income from Social Security, pensions, or annuities and who do not rely on RMDs to pay regular expenses. It can also work for retirees who want to grow their portfolios for future healthcare costs or leave more assets to heirs. Keeping this money invested can help preserve your purchasing power over time.

After paying the taxes owed on your RMD, you can move the remaining funds from your traditional IRA, SEP IRA, SIMPLE IRA, 401(k), or 403(b) into a regular investment account. This keeps your withdrawn money invested and gives it the potential to continue growing even after it leaves a tax-deferred account.

You can also transfer assets in kind from your retirement plan to a taxable account instead of selling them. This means you move the same investments, such as mutual funds, ETFs, or individual stocks, and the value of that transfer counts toward your RMD. The IRS only requires that you take the withdrawal and pay the tax on it. You are not required to sell or spend the money.
Taxable accounts can generate income and capital gains that you may have to report each year. A financial advisor or tax professional can help you review your reinvestment options, manage the tax effects, and make sure the plan fits your overall retirement goals.

Funding an annuity with RMDs can make sense for retirees who already have sufficient liquid assets for short-term needs and want to secure part of their future income. This strategy turns part of your retirement savings into predictable payments while keeping other assets available for growth or emergencies.

An annuity is a contract with an insurance company that exchanges an upfront payment for a guaranteed stream of income. Some retirees use annual RMD withdrawals to gradually fund an annuity that begins payments in their late 70s or early 80s, when other income sources may decline.

For example, a retiree who receives an annual RMD could use those withdrawals to buy portions of a deferred income annuity. And by age 80, those purchases might provide extra monthly income for life, depending on interest rates and contract terms.

Different types of annuities offer different features. Fixed annuities pay a set amount, while variable and indexed annuities link payments to investment performance or a market index. Some contracts include inflation riders that increase payments over time, though these usually reduce the initial payout. Because costs, surrender periods and guarantees vary, it’s important to compare options before committing funds.

A senior couple reviewing their savings to make sure they have enough cash set aside for unexpected expenses in retirement.

SmartAsset and Yahoo Finance LLC may earn commission or revenue through links in the content below.

An emergency fund gives you quick access to cash for unexpected costs such as home repairs, medical bills, or travel to assist family. Having this reserve can prevent you from selling long-term investments at the wrong time.

In retirement, market declines can have a bigger impact because you may rely on your portfolio for income. An emergency fund helps reduce that risk by providing a cushion during periods when markets fall. Instead of withdrawing from your investment accounts during a downturn, you can draw from your cash savings until markets stabilize.

You can keep your RMD funds in safe, interest-bearing accounts such as high-yield savings accounts, money market funds, or CDs. For example, if you receive a $10,000 RMD, placing it in an account that earns 4% annual interest adds both liquidity and modest growth. These accounts protect principal and allow easy access without market exposure.

Reinvesting your RMD in a qualified charitable distribution (QCD) can reduce taxable income and improve the efficiency of your retirement withdrawals. A QCD allows you to transfer up to $108,000 in 2025 from an IRA directly to an approved charity once you reach age 70½¹. And if you are 73 or older, the amount transferred also counts toward your RMD, but is excluded from your adjusted gross income (AGI).

Because the QCD amount never enters taxable income, you receive a full benefit even if you use the standard deduction. For example, if your RMD totals $30,000 and you direct $12,000 to a charity through a QCD, only $18,000 appears as taxable income. The smaller income figure can help keep you in a lower tax bracket and reduce the impact of income-based phaseouts.

Lowering AGI can also help you reduce income taxes on Social Security benefits, limit exposure to Medicare income surcharges, and maintain eligibility for certain tax credits.

Even though you cannot use RMD withdrawals to complete Roth IRA conversions, you can use them to pay the taxes triggered by those conversions. So, for example, if your RMD is $40,000, you cannot satisfy that requirement by converting $40,000 to a Roth IRA. You must first withdraw the $40,000 and move it into cash or a taxable account. Once the withdrawal is complete, you can use part or all of that $40,000 to pay the income taxes due on a separate Roth conversion completed that same year.

When you move assets from a traditional IRA or 401(k) into a Roth IRA, the converted amount is treated as taxable income for that year. Using your RMD to cover the tax bill allows you to convert other funds without reducing the total amount added to your Roth account.

This approach can help you manage future tax exposure and reduce required withdrawals over time. Once assets are in a Roth IRA, they are no longer subject to annual RMDs, and qualified withdrawals are tax-free. By using RMDs to pay conversion taxes each year, you can gradually shift money out of taxable retirement accounts and create more flexibility for future income planning.

A retiree reviewing options for using RMD withdrawals, including investing, charitable giving, or building cash reserves for future needs.

Once you start taking RMDs at age 73, you have to withdraw money each year, but you can still use it wisely. After paying taxes, you can invest the rest, build extra income with an annuity, keep cash for emergencies, give through a QCD to lower taxes, or use it to pay taxes on a Roth conversion. Your choice will depend on your income, expenses and goals. A financial or tax professional can help you decide how to make the most of your RMDs.
- A financial advisor can help you determine how much to keep in an emergency fund and where to hold it for safety, liquidity, and modest growth. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you want to build your savings up consistently, consider setting up automatic transfers from your checking to your savings accounts. This approach could help you make saving a routine part of your financial life.
Photo credit: ©iStock.com/Andrii Dodonov, ©iStock.com/shapecharge, ©iStock.com/Iuliia Zavalishina
1. “Give More, Tax-Free: Eligible IRA Owners Can Donate up to $105,000 to Charity in 2024 | Internal Revenue Service.” Home, https://www.irs.gov/newsroom/give-more-tax-free-eligible-ira-owners-can-donate-up-to-105000-to-charity-in-2024. Accessed Sept. 19, 2025.
  
  ↩
  
  ︎
The post 5 Smart Money Moves to Make With Your RMDs appeared first on SmartReads by SmartAsset.
[ad_2]

Source link
October 9, 2025
Why I’m not doing anything to cope with lower interest rates

[ad_1]

How should a retail investor deal with Wednesday’s interest rate cut by the Federal Reserve and with the future rate cuts that seem to be on the horizon?

What I plan to do is nothing. Which may be what you should do too.

How can I say “do nothing” when the airwaves, print media, and the internet are filled with advice and suggestions — and warnings — about how to handle the Fed’s rate cut?

Let me show you why my wife and I aren’t planning to do anything about the rate cuts, which will reduce our interest income but not threaten our overall financial well-being. And why you may not want to do anything, either.

Here’s the deal. The Fed has cut the federal funds rate to between 4.5% and 4.75% from the former 5% to 5.25%. Fed Chairman Jerome Powell has made it clear that the Fed is planning at least one more rate cut this year.

8/29/24

The Fed controls only this short-term rate, but lowering it puts downward pressure on longer-term rates as well. That’s great, of course, for many of us, making it easier and cheaper to borrow. But it’s not great for savers. That’s because the income they get on their savings is going to decline.

Read more: The Fed rate cut: What it means for bank accounts, CDs, loans, and credit cards

We have significant cash holdings, which we keep in low-cost, high-quality money market funds. Our income from those funds, which has risen nicely over the past few years, is going to decline. But such is life.

Some people advise you to lock up yields by switching cash into long-term bonds or long-term certificates of deposit, whose interest rates are fixed and won’t fall because of the Fed’s rate cuts.

However, there’s a problem with doing that.

Locking up yields by buying long-term bonds or CDs makes your money illiquid. This exposes you to some long-term risks, such as having to sell at a loss if rates rise — which they will sooner or later, trust me —or if you need the cash that you’ve locked up long-term.

Money market man? Federal Reserve Bank Chair Jerome Powell (Photo: Chip Somodevilla/Getty Images) (Chip Somodevilla via Getty Images)

By contrast, if you’ve done what we have done — put our surplus cash into well-regarded, low-cost money market funds — your income will go down when the Fed’s rate cuts work their way through the financial system. But you’ve still got liquidity, the ability to access your cash on demand, which is very important.

The one thing that I won’t do — and that you shouldn’t do, either — is to put my money into a bank savings account, which typically pays yields approaching zero. The rates on those accounts aren’t likely to fall much, if at all, because they’re already so low.

So if you’ve got $3,000 or more of cash sitting in a bank savings account but don’t have a money fund account, you’ll probably do well to open an account in a low-cost, high-quality fund.

To be sure, unlike bank accounts, money funds aren’t backed by the Federal Deposit Insurance Corp. But there are plenty of high-quality, conservatively run low-cost funds. It’s a very competitive business, with $6.68 trillion in assets, according to Crane Data. They are highly unlikely to fail.

The most important thing for you to do now is to stay calm and remember that if you end up doing nothing to cope with lower interest rates, you’ll have plenty of company. Including me.

Don’t doubt WB: Warren Buffett in Omaha, Nebraska. (Photo: AP/Nati Harnik, Archivo) (ASSOCIATED PRESS)

Update

Last July, I wrote a Yahoo Finance column with the headline, Warren Buffett is turning 94 next month. Should Berkshire investors start to worry? I said that Berkshire Hathaway stock had underperformed Admiral shares of Vanguard’s S&P 500 index fund since my wife and I bought Berkshire shares in January 2016.

Berkshire has since rallied and outperformed the S&P 500.

At Thursday’s market close, Berkshire was up 253% (15.6% a year) since we bought it. During that same period, the index fund has returned 242% (15.2% a year), according to Jeff DeMaso of the Independent Vanguard Adviser.

Score one for the Oracle of Omaha.

Allan Sloan, a contributor to Yahoo Finance, is a seven-time winner of the Loeb Award, business journalism’s highest honor.

Click here for the latest personal finance news to help you with investing, paying off debt, buying a home, retirement, and more

Read the latest financial and business news from Yahoo Finance

[ad_2]

Source link

September 21, 2024
ETFs are on pace to break record annual inflows, but this wild card could change it all

[ad_1]

Exchange-traded fund inflows have already topped monthly records in 2024, and managers think inflows could see an impact from the money market fund boom before year-end.

“With that $6 trillion plus parked in money market funds, I do think that is really the biggest wild card for the remainder of the year,” Nate Geraci, president of The ETF Store, told CNBC’s “ETF Edge” this week. “Whether it be flows into REIT ETFs or just the broader ETF market, that’s going to be a real potential catalyst here to watch.”

Total assets in money market funds set a new high of $6.24 trillion this past week, according to the Investment Company Institute. Assets have hit peak levels this year as investors wait for a Federal Reserve rate cut.

“If that yield comes down, the return on money market funds should come down as well,” said State Street Global Advisors’ Matt Bartolini in the same interview. “So as rates fall, we should expect to see some of that capital that has been on the sidelines in cash when cash was sort of cool again, start to go back into the marketplace.”

Bartolini, the firm’s head of SPDR Americas Research, sees that money moving into stocks, other higher-yielding areas of the fixed income marketplace and parts of the ETF market.

“I think one of the areas that I think is probably going to pick up a little bit more is around gold ETFs,” Bartolini added. “They’ve had about 2.2 billion of inflows the last three months, really strong close last year. So I think the future is still bright for the overall industry.”

Meanwhile, Geraci expects large, megacap ETFs to benefit. He also thinks the transition could be promising for ETF inflow levels as they approach 2021 records of $909 billion.

“Assuming stocks don’t experience a massive pullback, I think investors will continue to allocate here, and ETF inflows can break that record,” he said.

Disclaimer

[ad_2]

Source link

September 7, 2024
Wall Street says buy stocks that pay dividends with $6 trillion of cash ready to be deployed
[ad_1]
Getty Images; Chelsea Jia Feng/BI
- Dividend stocks are set to surge as investors deploy $6 trillion from money-market funds, Bank of America says.
- Investors could be looking to invest their cash as the Fed gets ready to cut interest rates in September.
- BMO agrees, and recommends high-yielding stocks including Abbvie, Chevron, and Gilead Sciences.
Dividend-paying stocks are poised to surge in the second half of the year as investors start to deploy the $6 trillion sitting in money market funds, according to Bank of America.

Strategist Savita Subramanian called the dividend trade a “pain trade,” meaning the bulk of investors are not properly positioned for the potential upside gains in dividend-paying stocks.

“Over $6 trillion sits in US money market funds as the Fed is poised to start cutting rates,” Subramanian said in a note this week. “Bond funds have seen record flows YTD, but we see more opportunities within equities for investors searching for yield.”

There are more than 200 S&P 500 stocks that offer a higher real return potential than the 2% offered by the 10-year Treasury yield, according to the note, and about 75% of those stocks are under-owned by professional investors.

Some of the highest-yielding S&P 500 companies include Walgreens Boot Alliance, Altria, Verizon, Ford, and AT&T. And while the S&P 500 as a whole offers a dividend yield of about 1.25%, there are nearly 300 S&P 500 stocks that offer a higher yield.

“Overall, we expect dividends to make up a larger proportion of returns than the outsized price returns and multiple expansion of the past decade,” Subramanian said.

BMO’s Brian Belski is another Wall Street strategist who expects big gains to be had from dividend paying stocks, especially after their lackluster performance since the October 2022 stock market bottom.

“We believe these stocks have turned the corner and recent relative strength is likely to persist in the coming months,” Belski said in a note on Tuesday. “With the Fed now likely to cut rates sooner than previously anticipated, the likely drop in longer-term yields in response should provide a boost.”

Some of the high-paying dividend stocks recommended by Belski include Abbvie, Chevron, Duke Energy, Gilead Sciences, and Pfizer.

As investors hunt for yield at a time when interest rates are about to fall, dividend-paying stocks could be the underloved area of the stock market that is set to boom.

The Fed is expected to make its first interest rate cut of the current cycle at its September FOMC meeting.

Read the original article on Business Insider
[ad_2]

Source link
July 31, 2024