There's a reason so many people opt to save for retirement in an IRA or 401(k) plan, as opposed to a taxable brokerage account.
Taxable brokerage accounts don't come with restrictions. You can put in as much money on an annual basis as you choose, and you take withdrawals at any time without having to worry about penalties.
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But with a traditional IRA or 401(k) plan, you get a tax break on the money that goes into your account. Your money also gets to grow on a tax-deferred basis in an IRA or 401(k), allowing you to avoid a tax bill on gains until you're ready to take withdrawals.
But there's a big drawback that comes with saving in one of these retirement plans. At some point, you'll be forced to take required minimum distributions (RMDs).
RMDs aren't a problem for a lot of people. Let's say you're on the hook for a $12,000 RMD each year, but you were already planning to supplement your Social Security benefits with a $1,000 monthly withdrawal from your savings. In that case, you're fulfilling your RMD pretty seamlessly.
RMDs can be more of a pain when you don't have a specific need or use for the money. Remember, not only do RMDs mean you're no longer growing that money in a tax-advantaged fashion, but they can increase your annual tax bill on a whole.
If you have an RMD coming your way this December and you're not sure what to do with it, don't despair. Here are a few good options to make the most of that money.
1. Invest it
You generally can't put an RMD back into a tax-advantaged account. However, there's nothing stopping you from taking that money and investing it in a regular brokerage account, where it can grow into a larger sum over time.
Just because you don't have a pressing need for your RMD now doesn't mean money won't be tighter in the future. By investing your RMD, you're putting it to work so that it may be worth a lot more down the line.
2. Give it to charity
RMDs give you a prime opportunity to support causes you care about. And if you go about them the right way, you may be able to avoid paying taxes on that money. If you do what's known as a QCD, or qualified charitable distribution, you'll avoid taxes on your RMD by sending that money to a registered charity directly out of your retirement plan.
Now there is a limit as to how much that QCD can entail, and it's $108,000 this year. If you file a joint tax return with a spouse, and they're also on the hook for an RMD this year, they, too, can make a $108,000 QCD for a total of $216,000 between the two of you.
3. Treat yourself to a major splurge
A lot of people have trouble spending their retirement savings after working so hard to accumulate that money. If you have an RMD coming your way, why not use that money to splurge on something you otherwise wouldn't purchase?
Some ideas:
- New plush carpeting and luxury bedding for your master bedroom
- A trip to a warm destination this winter that includes your grown kids
- A lawn and snow removal service so you don't have to spend hours maintaining your property year-round
- Sailing lessons -- or a small boat, depending on the size of your distribution
There are so many different purchases you could make with that money that could either enhance your life or open the door to an experience you've always dreamed of having. So rather than look at that withdrawal as a burden, try to look at it as a green light to treat yourself.
An upcoming RMD does not have to be a bad thing if you're smart about how you use the money. Consider reinvesting those funds, donating them to charity, or giving yourself the gift of a big purchase you deserve.
