Many older investors choose to satisfy their required minimum distributions (RMDs) by making withdrawals from retirement accounts annually in December. That makes now a good time to contact clients and help them stay on track. The Internal Revenue Service has specific rules for taking RMDs. In fact, the penalty for not taking a required distribution is steep — 50% of the required amount.

If you have clients who do not rely on retirement account distributions to meet their immediate income needs, there are a number of options for putting the money to good use — including helping grandchildren save for college.

Help grandchildren or other family members save for college
Clients who are grandparents may choose to use RMDs to fund 529 college savings accounts for grandchildren. Although the distribution still needs to be reported as taxable income, once the funds are invested within a 529 plan, they will grow tax free and can be distributed tax free for qualified higher education expenses. As an additional benefit for the grandchild, a 529 account owned by grandparents is not currently considered in the calculation of a student’s eligibility for federal financial aid.

Clients need to be aware that contributions to 529 accounts are subject to federal gifting limits, currently $13,000 per year for each recipient for 2012. Alternatively, an individual funding a 529 program may choose to “front-load” five years worth of gifts (currently $13,000 times 5 for a total of $65,000 per account beneficiary).

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For more information on the ins and outs of RMDs, please review our literature piece, “What you need to know about required IRA withdrawals.”