For many people, saving for retirement in a traditional IRA or 401(k) seems like a good idea until their senior years roll around. At that point, many people suddenly find themselves faced with regrets when they realize they're on the hook for required minimum distributions, or RMDs.
RMDs apply to traditional retirement plans only. If you have a Roth IRA or 401(k), RMDs aren't something to worry about.
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RMDs can be a huge pain for a few reasons. First, those forced withdrawals lower your IRA or 401(k) balance, leaving you with less money to enjoy tax-advantaged growth.
Secondly, RMDs can drive your tax bill up substantially, which is a huge hassle if you don't actually need the money. And they could also drive your taxable income up to the point where you're subject to surcharges on your Medicare premiums.
But rather than look at RMDs as a negative thing, you may want to change your attitude about them. In fact, your RMDs could actually be your ticket to the retirement of your dreams.
Putting a positive spin on RMDs
Nobody wants to pay more taxes, so if you don't need your RMDs, it's easy to see why you might be bitter about having to take them. But just because you don't need the money from your RMDs doesn't mean you can't find ways to put that money to good use.
Let's say you have modest retirement expenses, so your Social Security benefits are enough to cover your costs. Let's also say you have a large IRA balance that leaves you with a $20,000 RMD.
That mandatory withdrawal may seem like nothing more than a hassle, since you'll have to pay taxes on that sum. But if you work with a professional to plan for that tax bill, that $20,000 could make your retirement a lot more enjoyable.
Let's say you normally wouldn't splurge on three big vacations a year because that's not your nature. Well, if you have a $20,000 distribution coming your way, that reads like a pretty good excuse to pack your bags.
Similarly, you may be used to maintaining your own home. If you have to take a $20,000 withdrawal from your IRA, why not use some of that money to make your life easier?
Hire a snow removal surface in winter, and pay for lawn care in the spring and summer. Or, treat yourself to a house cleaner so you can free up those hours each week for an activity you'd rather be doing.
Use your RMD to enjoy your retirement more
Just because you don't need the money your RMD provides doesn't mean it can't do good things for you. So if you're gearing up to start taking RMDs, try not to be bitter about them. Instead, embrace the opportunities that money allows for.
Of course, there are some steps you can take to minimize the tax impact of RMDs. Qualified charitable distributions are one example.
But before you write off the idea of using the money yourself, think about what it could do for you instead. You may find that your RMD is actually a blessing in disguise.
