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5 Things to Do with Your RMD Money

When life gives you lemons, make lemonade. When the government forces you to take required minimum distributions (RMDs), make them work for your financial goals.

Many retirees see RMDs as a financial obstacle. Starting at age 70½, you typically must withdraw a minimum distribution from retirement accounts in which you have made tax-deferred contributions or had tax-deferred earnings (they do not apply to Roth IRAs). If you don’t, you face a stiff tax penalty. In addition to drawing down your retirement savings, RMDs are taxed as ordinary income, which could bump you into a higher tax bracket. [See How RMDs Affect Your Investment Accounts.]

On a positive note, the IRS cannot tell you what to do with your RMD.

Since RMDs must be withdrawn each year by December 31, the year-end is a good time to assess your plans for the money. If you haven’t reached the age of 70½ yet, it’s still helpful to consider how you intend to manage RMDs in retirement. Here are five things you can do with your RMD money.

1. Pay for retirement expenses

You may need to withdraw a certain amount from your investment portfolio each year to supplement other sources of retirement income such as Social Security or a pension. That withdrawal amount depends on your living expenses and financial goals.

Your RMD is calculated by taking the balance of your retirement accounts as of December 31 of the previous year, divided by your life expectancy according to actuarial tables provided by the IRS. The amount you already plan to withdraw from your investment portfolio may satisfy this amount, in which case you do not have to take out more than you need or want.

Additional information about how RMDs are calculated can be found in IRS Publication 590.

2. Reinvest it

If you are in the fortunate situation where you do not need your RMD money for living expenses or the amount is greater than needed, you can reinvest it into a taxable account. Your RMD money can then potentially generate additional growth in your portfolio. This may help you pursue future financial goals such as leaving an estate.

3. Donate it to charity

In a 2013 study by Blackbaud, Baby Boomers give an estimated $61.9 billion per year to charity. You can help fulfill any charitable aspirations with your RMD money. At times, you have been allowed to use qualified charitable distributions to help satisfy your RMD. However, keep in mind tax rules frequently change. Always consult your tax adviser or current-year tax laws.

4. Treat yourself

In retirement, you generally transition from saving money to spending money. If your necessary living expenses are fully funded, you may want to use your RMD as disposable income for discretionary expenses. Put your RMD toward travel, gifts toward the family, starting a business, or any other desired financial goal.

5. Save it

Finally, if you don’t immediately need your RMD money, you might consider contributing it to an emergency fund in a cash, CD or money market account. The future is uncertain; you may face unforeseen expenses such as healthcare or home maintenance costs. An emergency fund may help alleviate times of stress and prevent the need to adjust your financial goals.

When you keep your financial goals in mind, you can turn the tax headache of your RMD money into something a little more sweet, kind of like lemonade. So, what might you do with your RMD?

For more investment tips for retirement, check out the 7 Financial Sins in Retirement you should avoid.