In the course of saving for retirement, I made the deliberate decision to house my nest egg in a combination of traditional IRAs and 401(k)s. Funding a Roth IRA or 401(k) would give me more options down the line. But based on my tax situation, it's largely made sense for me to stick to traditional retirement accounts.
Because of this, I have to brace for a couple of things:
- Taxes on my withdrawals once I'm ready to start taking them.
- Required minimum distributions, or RMDs, which you have to take at a certain age whether you're ready or not.
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For some retirees, RMDs aren't an issue. If the IRS forces you to withdraw $10,000 a year from your IRA to satisfy your RMD, but you were already planning to take that much annually, there's no issue.
Rather, RMDs become a problem when you don't want to take the money out of your savings. At a minimum, they can create a tax burden for you. And if they raise your income enough, they can cause other issues, like pushing you into Medicare surcharge territory.
Now if you ask me, I'd rather have maximum control over my money in retirement and not have to worry about RMDs. But I'm also not too upset about having to take RMDs. Here's why.
It's not all bad
While I may not be thrilled with the idea of RMDs, those mandatory withdrawals don't necessarily have to throw your finances for a loop. And that's why I don't necessarily dread them like some people do.
For one thing, there's no requirement to spend RMDs. You can take your withdrawals and immediately reinvest them in a taxable account.
I also hope to be in a position to support different charities in retirement. And if I donate strategically, I can avoid RMD taxes by utilizing qualified charitable distributions.
But there's another reason RMDs don't bother me so much -- they can be an opportunity to splurge on things you might otherwise deny yourself.
I'm not an overly frugal person, but I often have trouble spending money on myself. If someone were to give me a $1,000 check with the contingency that I must spend the money within 30 days and I can't deposit it into any sort of savings account, I'd find a good use for that money.
Maybe I'd buy tickets to a concert and pay for an overnight hotel stay. Maybe I'd get my car detailed so the many dings and scratches I've accumulated through the years aren't as obvious. There are so many possibilities.
I sort of view RMDs the same way. While you can save or reinvest them, I see them as an opportunity to treat myself to purchases or experiences I may not otherwise spend money on so freely. And it's hard to get upset about that.
Make the most of your RMDs
If you have RMDs coming up, don't assume the worst. You may have to do some planning to minimize the tax blow. But you also have plenty of options for putting those withdrawals to good use.
And if you're in a good position financially, one thing you may want to do is use your RMDs to splurge a little. By the time you're in your 70s and are on the hook for RMDs, it's more than fair to say that you've earned it.
