The best way to take required minimum distributions from IRAs
Q: Some investment firms have a program that distributes partial required minimum distributions (RMDs) from IRAs over 12 months. Would this act like dollar-cost averaging in reverse to balance out the market highs and lows and avoid trying to time the market? Thoughts? — Dave Scott
A: You are correct that taking a monthly distribution from your IRA to satisfy the annual RMD would effectively be dollar-cost averaging out of the market. “However, in a down market, looking at a market like 2000–2002 or 2008, even dollar-cost averaging out locks in substantial losses,” says Phillip Putney, president of AFS Wealth Management in Farmington Hills, Mich. “This is the effect of sequence of returns.”
A more effective way to handle distributions of the sort you’re proposing, however, would be to have money set aside in a low-volatility fund or investment from which you take your RMDs. This tactic, says Putney, prevents you from taking money out of the more volatile funds while they are down.
Q: Can I exclude on my tax return interest from savings bonds used for qualified educational expenses for a non-dependent grandchild's college tuition? — Hyla Epstein, Fort Lee, N.J.
A: Unfortunately, to qualify for the interest exclusion the beneficiary must be a dependent of the taxpayer or the taxpayer's spouse, says Brian Boswell, vice president of research and development for Savingforcollege.com. “It's not like a Coverdell or 529 plan where the account owner has wide flexibility on who they name as the beneficiary.”
For more read,
- Using Savings Bonds for Education (https://www.treasurydirect.gov/forms/savpdp0051.pdf) and - IRS Form 8815, Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989 (For Filers With Qualified Higher Education Expenses) (https://www.irs.gov/pub/irs-pdf/f8815.pdf)
Robert Powell is editor of Retirement Weekly, contributes regularly to Paste BN, The Wall Street Journal and MarketWatch. Got questions about money? Email rpowell@allthingsretirement.com .