Key Points
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Reinvesting RMD dollars allows your money to continue to grow.
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Getting rid of old debt could be another smart way to use your RMD.
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Grandparent-owned 529 plans are a third option — and have tax benefits.
A required minimum distribution (RMD) is the minimum amount you must withdraw from certain retirement accounts annually. Generally, RMDs kick in when you reach age 73 (or 75 if you were born in 1960 or later).
If you’re fortunate enough not to need your RMD to pay bills, you may wonder about other ways to use the funds. Here are seven of them.
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1. Reinvest
One nice thing about being retired is that you may have more time to research investments. If you don’t have an immediate need for your RMD withdrawal, consider reinvesting it in an investment you’re interested in and plan to hold on to for the long term.
Since RMDs are specifically designed to ensure you pay taxes on funds you once invested with pre-tax dollars, you’ll have a tax bill due. But once those funds have been set aside or the taxes have been paid, put the remainder to work for you by making a solid investment.
2. Reduce debt
If you have pesky debts hanging around, use RMDs to eliminate them. Suppose you were fortunate enough to purchase a car before interest rates increased. You may think paying off debt with a lower interest rate makes no sense. However, jettisoning the financial burden could be the smart move if debt stands between you and an easily achievable monthly budget.
3. Recast your mortgage
Consider recasting your mortgage. Here’s how recasting works:
- You make a significant payment to the principal (most lenders require a minimum of $5,000 to $10,000, although your lender could charge more).
- Unlike refinancing, recasting a mortgage does not change your interest rate. So, if your current mortgage rate is 5.5%, it will remain at that rate once the recasting is completed.
- The loan term remains the same, so if you had 20 years left on your original term, that’s the term used to calculate the new payment.
- The lender recalculates your monthly mortgage payment based on a new, lower balance. For example, if you purchased your home five or 10 years ago, your balance is lower today than when you first bought the property. In addition, the lump sum payment is subtracted from your remaining balance.
- Because recasting doesn’t require a closing process, you’ll pay a small, one-time processing fee (usually around $250 to $500).
- Once recasting is complete, you’ll pay your new, lower monthly payment.
4. Create a healthcare account
According to a CBS report, retirees are often surprised by how much they spend on out-of-pocket medical expenses. Even for Medicare recipients with Part A and Part B, plenty of services are not covered, including dental, vision, hearing aids, prescription drugs, and copays. For that coverage, seniors must pay extra, and even with extra coverage, there are still out-of-pocket costs.
To avoid a major blow from surprise medical costs, you may want to tuck this year’s RMD into an account explicitly earmarked for such expenses.
5. Pad your emergency account
Speaking of surprises, look at your emergency fund to determine whether it can use some padding. If you don’t have enough money put away to cover three to six months’ worth of expenses, your emergency fund could be the perfect destination for this year’s RMD.
6. Invest in education
If you’re itching to help grandchildren pay educational expenses, you can either contribute to a parent-owned account or open an account of your own and reap the tax benefits. As a grandparent, you can contribute up to $19,000 annually without triggering a gift tax. Plus, recent changes to grandparent-owned 519 plans allow tax-free withdrawals.
7. Do something kind for yourself
There’s a relatively new trend researchers call the “retirement consumption puzzle.” After years of hard work and saving, many retirees appear anxious about the jobless years ahead and continue to save every dollar they can. If you’re easily paying your bills and your budget looks fine on paper, think about giving yourself a break. Buy that hot tub you’ve always wanted, take the vacation you’ve always dreamed of, or hire a contractor to add safety features that will allow you to age safely in place. Just do something that makes you happy.
Given the number of things in this world that can’t be controlled, it’s good to know that you have options when it comes to RMDs.
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