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Ask the expert: What to do with required minimum distributions from an IRA
Q: I've reached the age where I have to take mandatory distributions from my IRA. However, I think the amount I'm required to take is more than my yearly spending needs are going to be. How should I invest the excess amount of those distributions?
A: Once you reach age 70 1/2, you are required to start drawing down your IRA. The required minimum distribution is a function of your age and the amount in your IRA. If it turns out that the required minimum distribution is greater than your spending needs, think of this as a happy problem to have--it beats the alternative of the IRA not generating enough money to support you. Still, it does leave the problem of what to do with the excess distributions.
For starters, a money market account would be a logical place to deposit your IRA distributions. This would give you the flexibility to see how your spending patterns go in your retirement years without tying up your money. A money market account isn't as accessible as a checking account, but it would allow you monthly access plus the ability to make some additional withdrawals should unexpected needs arise.
A money market account may be a better choice than a traditional savings account because money market rates are typically higher than savings account rates, but be sure to shop around because money market rates can vary greatly.
If the amount in your money market account starts to accumulate because your IRA distributions continue to exceed your immediate needs, then think of the money market account as an emergency fund. However, once it exceeds six to twelve months worth of spending needs, it would be more than you'd likely need in an emergency. At that point, consider starting to invest some of your excess IRA distributions more aggressively, such as in a moderate-risk balanced mutual fund.
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