If you've built savings by contributing to a pretax retirement account, you will generally be required to begin taking required minimum distributions (RMDs) at age 73 (or 75 if you were born in 1960 or later). Once the money is distributed, you don't have to spend it, but you cannot leave it in a tax-deferred account.
If you're in the fortunate position of not needing your RMD to pay everyday living expenses, it's time to come up with a plan for the best ways to use them. Here are five ideas worth considering.
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1. Pay off debt
High-interest loans and credit card debt is a money suck. With the average credit card interest rate at 23.77%, it makes little sense to continue throwing money at it. If you're carrying any debt with an interest rate exceeding the amount you could earn by reinvesting RMD funds, now is a good time to pay it off.
2. Reinvest
You may be required to take an RMD, but that doesn't mean you can't reinvest the funds (once you've paid taxes on them). Consider reinvesting RMDs in a taxable brokerage account to give them more time for potential growth.
You may also want to consider a mutual fund or an annuity. If you've continued to work part-time or full-time in retirement and meet the income limits, contributing the money to a Roth IRA is another option.
3. Donate to a worthy cause
If there's a cause you care deeply about, a Qualified Charitable Distribution (QCD) lets you donate your RMDs to a qualified charity. In addition to doing something with your money that you can feel good about, making a QCD reduces your taxable income for the year and can satisfy your RMD obligation.
4. Plump up that emergency fund
Even if you already have a sufficient emergency fund, consider how making it larger could come in handy. For example, having cash or cash equivalents available means you're less likely to have to pull from your retirement account when the market is depressed. It also means having more money on hand to purchase high-quality assets when prices drop.
Having more cash available gives you the freedom to help out family members when they're in a pickle, age-proof your home, or cover unexpected healthcare expenses.
5. Use it as a maintenance fund
Let's say the roof on your home is 25 years old, and though you're not having trouble with it, you know it's just a matter of time. Why not replace it while you have the money? If nothing else, it could save you from a leaky roof and damage to the interior of your home.
You can head off all kinds of problems before they become too expensive by carefully maintaining your home's structure and fixtures and staying on top of auto maintenance and repairs. It may not be as exciting as taking a long cruise or traveling through Egypt, but imagine the peace of mind maintaining your property can bring.
If you don't need your RMDs, you're in a unique position. Take your time to determine the best way to make the most of it.
