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Retirement funds that are not needed immediately after retirement can be reinvested to generate a second source of income. Although it seems too good to be true in troubled times like these, sometimes people do end up with more money in their retirement accounts than they need. Chances are, they may have a part-time job that pay for their expenses, or they may have passive income or social security that pays their bills. It is a good idea to learn how to invest retirement funds after retirement to protect their assets from inflation and market crashes.
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Individuals having a traditional IRA are required to start withdrawing from their IRA once they reach the age 701/2. These Required Minimum Distributions(RMD) are mandatory and there is a 50% penalty for the difference between the RMD and the actual amount which is withdrawn. For example if the RMD for a person for the year 2010 is $2000 and he withdraws only $1000, he will have to pay a penalty of $500 (50% of the difference between $2000 and $1000). Instead of paying a penalty, retirees who do not need the funds can reinvest their money elsewhere. The criteria for such investments should be that they should generate a decent rate of return, at the same time being safe.
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Tips on Choosing Reinvestment Avenues for Retirement Money
- Investments should be liquid- Retirees do not get a long time to invest their money, unlike people in their 30s and 40s. There can be unforeseen circumstances which may force them to withdraw their money immediately. Any investment that they choose should be liquid enough to be withdrawn in case of an emergency.
- Investments should be safe- Since the retirement money should last the life term of the retiree, it is not prudent to invest the retirement money in risky ventures or in aggressive asset allocations such as an 80/20 asset allocation.
- It should generate a decent return on investment- The basic idea behind reinvesting retirement money is to generate a good return on investment so that there is a higher chance that the money would last a retirees' life term.
- Reinvestment to avoid penalty- As discussed earlier, reinvesting Required Minimum Distributions is a good way of avoiding penalties on distributions on traditional IRAs that are not needed for the time being.
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Ways to Reinvest Retirement Money
Money invested in tax-efficient funds with high-yields will generate a steady stream of cash flow. Some of the examples are Exchange Traded Funds, Index funds and tax managed funds. Each of these have its own advantages and disadvantages and retirees can choose one that is best suited for them. They can also invest in property, for example an apartment which can be rented out is a great option if enough funds are available for down payments and to cover the monthly mortgage payments.
Traditional IRA holders can invest their RMDs in a Roth IRA, although they must satisfy the criteria for contributing to a Roth IRA. Another option is to partially or fully convert a traditional IRA to a Roth IRA. Converting to a Roth IRA is a good idea when unused retirement funds are intended to be passed on to heirs. Since distributions from a Roth IRA are tax-free, heirs get the full benefit of the funds remaining in Roth IRA. Setting up a trust is another option for those who wish to pass their retirement funds to their heirs. A trust provides a lot more flexibility than an IRA or other retirement accounts when it comes to estate planning.
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- IRS Website for information about IRAs, http://www.irs.gov/pub/irs-pdf/p590.pdf
- For information about IRA distributions, http://www.irs.gov/retirement/article/0,,id=111413,00.html#distn
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