When I was younger and earned an entry-level salary, I made a big mistake. I opted to save for retirement in a traditional IRA instead of a Roth account.
At the time, I liked the idea of an immediate tax break. But because my income wasn't very high, I should've paid taxes on my retirement plan contributions up front and gone with a Roth.
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Through the years, my household income has thankfully grown. And so it hasn't really made sense to fund a Roth retirement plan from a tax perspective.
As a result, my entire retirement nest egg now sits in traditional IRAs and 401(k)s. And that means I'll be subject to required minimum distributions, or RMDs.
But I'm not going to let those RMDs stress me out too much. Instead, I intend to benefit from them in different ways. Here's what I expect to do with that money.
Making the most of RMDs
A lot of people find RMDs burdensome because they can create a huge tax headache. They can also have other unwanted consequences, like driving up the cost of Medicare premiums.
I'd prefer not to have to take RMDs from my savings. But I also don't know that I'll have an opportunity to do a full Roth conversion ahead of retirement.
As such, I'm expecting to face RMDs in some shape or form. That doesn't mean I intend to let that money go to waste, though.
One big misconception about RMDs is that you have to spend the money you're withdrawing from your savings. That's not true.
Once that money is distributed, you can use it as you please. So if I don't need my RMDs to cover bills, part of my plan is to simply reinvest the money in taxable accounts.
As an example, let's say I have a $20,000 RMD I don't have an obvious use for. I'm not going to just blow $20,000 on clothing or furniture I don't need. I can instead invest that money in other assets, and in an account that won't force me to take distributions yearly.
Another thing I plan to do with my RMDs is use them to support charities I care about while minimizing my tax burden. Qualified charitable distributions, or QCDs, allow you to send money directly from a traditional IRA to a registered charitable organization. The nice thing about QCDs is that they satisfy your RMDs but don't increase your modified adjusted gross income.
Don't let your RMDs go to waste
For some people, RMDs serve as an opportunity to splurge on things they wouldn't spend money on otherwise. And there's nothing wrong with using your RMDs to pay for vacations, conveniences, or other things that make your life better in retirement.
I have no problem using RMDs for the same purpose. But if I don't need the money and can swing those extras with income outside of RMDs, then I intend to put those mandatory withdrawals to good use by investing and supporting charities. You may want to work with a financial advisor to do the same so your RMDs don't have to become a source of aggravation.
