Q: My wife and I are in our late 60’s and trying to figure out how to handle the required minimum distribution from our IRA. We don’t need it as income right now, but might in the future. Is there a way to avoid income taxes on it? - Ronald

A: Ronald, since you don’t need the required minimum distribution (RMD) to pay your bills at this time, the best way to avoid taxes would be to take advantage of the charitable rollover option that was made permanent by Congress at the end of 2015. By having your financial advisor send the RMD directly to any 501c3 charitable organization (church, alma mater, etc.), you avoid taking possession of the funds, and therefore avoid the income taxes. Then if your circumstances change in the future such that you do need the money (or would like to re-invest it in a non-qualified account), simply direct your advisor to send the check to you. More than likely, the income taxes that you pay at that time will be less than you would have paid when you initially earned the money, since your income tax rate in retirement is typically lower than when you were working.

It is worth noting that the IRS will not determine the amount of the RMD for you. If you use a financial advisor, the firm may provide this information to you as a service, but ultimately the responsibility is yours and you will be held responsible if the proper amount is not taken. Fortunately, there are many calculators available on-line to assist you.

Finally, since you didn’t specify, I am assuming this is a traditional IRA. If this is a Roth IRA, be aware that you do NOT need to take RMDs from a Roth IRA until after the passing of the IRA owner.

 

Q: I got married recently, and my husband and I are now dealing with our joint debt. Between the two of us, we have student loan debt, mortgage debt and credit card debt. Which should we concentrate on paying off first? - Tiffani

A: Tiffani, congratulations on the marriage! I applaud you on thinking immediately about starting the relationship off on solid financial footing. Before I get into your question, I want to advocate strongly for you and your husband to start using a monthly budget if you’re not already. If budgeting is new to you, it’s fairly simple to go back at least three months using your old check registers, credit card bills, and on-line banking statements to re-create where your money has gone. I’m willing to bet that you’ll learn some interesting things about your respective spending habits. You’ll also no doubt find some areas to save, thereby allowing you to really attack that debt.

For a combination of reasons, revolving credit card debt is what you need to alleviate immediately. Shake out the couch cushions and dig your yard up for buried treasure if you have to, but get that credit card paid of ASAP! Not only is it very high-interest (over 15 percent), but it also may be hurting your credit score. Going forward, if you can’t pay off the plastic in full each month, shred the cards and give yourselves a realistic weekly allowance based both on your budget and on your new lifestyle as a married couple.

As for the other debt, the current national average for both mortgage interest and student loans is around 5%, and the interest on both is tax deductible, so these are less pressing unless you’re behind with either. If you’re current on both, you might consider setting a few dollars aside for an emergency fund. However, if you really want to put it toward debt, I would apply it toward your mortgage. On a traditional 30-year mortgage, you’re going to pay more in interest than what you spent on the house, so every extra dollar applied toward the principle of your loan will cut that down. Just make sure those extra payments are going against the principle, and the bank isn’t just holding it. You typically need to call them and explicitly make sure this is happening. Good luck!

 

If you have a question for Ask Eric, send an e-mail to AskEric@mail.com.

— Eric Litwiller has spent the last seven years helping people achieve their financial goals through the use of budgets, retirement vehicles and estate planning options. Prior to his current position in fund development at Friends University, he worked for a faith-based financial services firm. He is not a licensed financial planner.