If you have to make required minimum distributions (RMDs), you must do so even if you don't need the cash right away. But that cash doesn't have to sit in your bank account. Just as quickly as you withdraw money from your retirement account, you can put it right back into assets that continue to grow.
A taxable brokerage account is the best option
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Taxable brokerage accounts give you all of the same investment opportunities that most people get from their retirement plans. If your retirement plan invested in index funds and you had to sell them when withdrawing funds, you can immediately put the money into your brokerage account and invest in an index fund.
These accounts also let you buy individual stocks and bonds. Some brokerage accounts even let you buy crypto and have additional assets available. However, index funds and exchange-traded funds (ETFs) are the simplest ways to invest that don't require as much monitoring.
Contributions to these investment accounts don't reduce your tax bill like traditional retirement accounts. However, your assets can continue to grow in a brokerage account tax-free as long as you don't sell them.
Use step-up basis for your heirs
If you never want to sell your investments, you can hold them for the rest of your life and pass them on to your heirs. Following this strategy lets your heirs receive assets at their stepped-up basis.
An investor who bought Microsoft (MSFT 2.09%) 40 years ago can hold their shares and never pay capital gains taxes if they pass the shares on to their heirs. Not everyone has the flexibility to hold their stocks that long, but investors who don't need to make RMDs may have no issue with buying and holding stocks for the rest of their lives.
If you are interested in providing a stepped-up basis for your heirs, you should prioritize selling stocks that have low capital gains when tapping into your funds.
Assess your risk tolerance
You have to start taking money out of your retirement account when you turn 73, but this number jumps to 75 in 2032.
Your early 70s typically aren't the years when you should make risky investments. Some people stick with bonds and high-yield stocks with good fundamentals behind them. Those assets are more valuable for people who will need cash soon or want to live on cash flow.
Some investors may still want to invest in growth stocks and index funds if they have a large enough financial buffer. A good rule of thumb is to invest money into index funds and growth stocks if you won't need it for at least the next three years.
