The nice thing about saving for retirement in a traditional IRA or 401(k) is getting a tax break on your contributions each year you make them. The downside is having to not only pay taxes on your withdrawals, but deal with required minimum distributions, or RMDs, in retirement.
RMDs can be a huge hassle when you're forced to remove money from your savings you don't have an obvious need for.
Image source: Getty Images.
It's one thing if you have to take a $12,000 RMD but you need $1,000 a month from your savings to supplement your Social Security checks. It's another thing to be forced to take retirement plan withdrawals when you're getting by just fine without that money.
Not only do RMDs mean giving up tax-advantaged growth on the money that comes out of your savings, but they could also stick you with an unwanted tax bill. But rather than grumble about RMDs, for the sake of your finances and mental health alike, you're better off making the most of them. Here are some ways you can put your RMDs to good use.
1. Reinvest the money
There's no rule stating you can't invest your RMDs. You just can't invest them in a tax-advantaged account.
If you don't need the money, you can use it to buy stocks or ETFs in a taxable brokerage account. You could also use the money to build a bond ladder if you're looking for steady income and prefer assets that don't carry as much risk.
2. Build yourself an emergency fund
Just as it's important to have cash reserves for emergency situations when you're working, so too do you need cash for surprise expenses in retirement. If you don't need your RMD for immediate bills, put it into a high-yield savings account so it can earn interest until you need to dip in.
You never know when an unplanned car repair or medical bill might arise. If you have your RMD waiting for you in savings, that expense could become a lot less stressful.
3. Invest in a more comfortable or efficient home
As a retiree, you may find yourself spending a fair amount of time at home -- more so than during your working years. And your RMD could make your home more comfortable or efficient.
Have an old washing machine that takes forever and glitches all the time? Use your RMD to buy a new one that makes your life easier and potentially lowers your utility bills.
Tired of your dingy bedroom carpet? Use your RMD to upgrade to something plush and cozy you'll love walking on.
4. Buy a memorable experience
Retirement gives many people an opportunity to enjoy experiences they didn't have time for during their working years. If you're sitting on an RMD you don't need, think about an experience you've always wanted to have.
Maybe you want to spend a month in Paris living and eating like a local. Maybe there are national parks in corners of the U.S. you've always dreamed of seeing. There's nothing wrong with using your RMD to make these experiences happen.
It's easy to look at your RMD as nothing more than a giant annoyance. But rather than focus on the negative, think about the opportunities you have for that money to enhance your life or improve your financial picture.
