If your retirement funds are held in a profit-sharing plan such as a 401(k), 403(b), 457(b), or individual retirement account (IRA), you'll deal with required minimum distributions (RMDs) one day. Specifically, the year you turn 73 (or 75 if you were born in 1960 or later).
Although withdrawals from these accounts will be taxed at your ordinary tax rate, you can use the remaining funds any way you'd like. Here are six great ways worth considering.
Image source: Getty Images.
1. Living expenses
Chances are, the reason you contributed to a retirement fund in the first place was so you'd be comfortable in retirement. If you need the funds you withdraw to cover the cost of living, that's a perfect way to use the money. If you don't need the entire RMD for the year, just use what you need and decide what to do with the rest.
2. Plumping up an emergency savings account
Experts generally advise that you have at least enough in an emergency savings account to cover three to six months' worth of expenses. For example, if your monthly expenses average $5,000, you'll want between $15,000 and $30,000 in an emergency fund.
3. Getting rid of debt
Nothing drains your bank account faster than debt -- particularly high-interest debt like credit cards. Use any funds you have left after paying everyday living expenses to pay down debt. Even if you can't retire the debt all at once, RMDs can help you chip away at it.
4. Reinvesting
You're free to take your RMD and reinvest it. Once you've paid taxes on the withdrawal, the rest can go directly into new investments. If you're not quite done watching your money grow, take time to examine your investment options before your next RMD is due.
5. Purchasing life insurance
Life insurance will be more expensive during your retirement years than it would have been if you'd purchased the same policy when you were young. However, that doesn't mean it's not a good idea. Using RMD funds to pay life insurance premiums can potentially leave your beneficiaries with a larger tax-free death benefit. Think of it as estate planning.
6. Making a qualified charitable distribution (QCD)
QCDs represent one of the best, most tax-efficient ways to save on taxes while also doing something good for others. If your RMD withdrawal is from an IRA, you can transfer up to $111,000 directly from the IRA to a qualified charity (if you're married, you and your spouse can each donate up to $111,000). While the funds count toward your RMD, they're excluded from your taxable income for the year.
One of the nicest things about having money put away in a retirement account is the number of options it gives you.
