Welcome to the November edition of FAQs and RAQs!
This month, we address client questions—some Frequently Asked, and others Rarely Asked.
FAQ: With federal government deficits so high, how close is America to a debt crisis?
America is on a challenging fiscal path, but we don’t think a crisis is imminent. Here’s one way to look at the situation:
Yes, the Federal debt burden is massive—$36 trillion. But just as remarkable are the nation’s income ($29 trillion GDP) and its assets ($155 trillion household net worth).
Thus, the real issue isn’t solvency—it’s cash flow. There’s a $1.9 trillion gap between government spending and tax revenue. This may require some difficult choices for the country.
But is America on the brink of financial ruin? We don’t think so. Although government debt is up, debt in some other sectors is down. Below is a look at household debt as a percentage of GDP.
Bottom line: focusing only on liabilities—and excluding assets and income—doesn’t provide the whole picture.
RAQ: I don’t need my Required Minimum Distribution (RMDs) for living expenses. What are my other options?
Most investors use their RMDs for living expenses. But if you don’t need the funds, here are some other options:
- Qualified Charitable Distributions (QCDs): QCD’s allow you to satisfy all or part of your RMD by donating it directly to charity. Because the money is never distributed to you as income, QCD’s can potentially save you on taxes.
- Reinvest: If you want the money to grow, consider putting RMD funds in a taxable account and investing in tax-efficient vehicles like Exchange Traded Funds (ETFs).
- Gifting: You may be able to gift the RMD proceeds to family without triggering gift taxes. Be sure to double-check IRS rules.
- Roth Conversion: RMD funds can be used to cover taxes on a Roth conversion, allowing other assets to grow tax-free.
- Spend Strategically: Even if you don’t technically need the money, you can set it aside for longer-term goals like a home upgrade or funding a grandchild’s 529.
As always, be sure to check with your tax preparer before deciding the best course of action.
Have a question? Drop us a line at carlsongroup@rwbaird.com. We’d love to hear from you!
Data source: Federal Reserve of St. Louis as of 11/6/24. Baird does not provide tax advice. All investments carry a level of risk, including loss of principal. PAST PERFORMANCE DOES NOT PREDICT FUTURE RESULTS.