Have you made arrangements for your year-end RMDs? It’s a key piece of retirement planning. And it’s not exactly mad money, but an influx of cash via a required minimum distribution (RMD) from your IRA or workplace retirement plan does give you options. The money is yours, of course. So, you can do with it as you please.
But, like all things related to money, there are ways to optimize the cash that makes its way back into your checking account after an RMD.
RMDs, of course, are mandated by the Internal Revenue Service (IRS). “You cannot keep retirement funds in your account indefinitely,” the IRS says. You generally must start taking these mandatory withdrawals when you reach age 73 (unless you inherited an IRA). RMDs apply to retirement accounts, such as IRAs (excluding Roth IRAs, which don’t require RMDs) and employer-sponsored 401(k)s, 403(b)s and 457(b)s. The amount of your RMDs, due each year by Dec. 31, is calculated based on your account balance from the end of last year and your life expectancy. The RMD withdrawal amount gets taxed at your ordinary income tax rate. So, what are smart ways to make the best use of an RMD payout?
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1. Use RMDs to make ends meet
If you need more money to pay the bills each month or need a lump sum to pay for a large expense, such as a car down payment or roof repair, RMD dollars can pay for these one-time or unexpected expenses. Remember, it’s better to pay bills from money that’s already been taxed, rather than, say, make another withdrawal from a taxable retirement account that results in a second taxable event.
2. Pay off expensive debt
High interest credit card debt is the enemy of personal finance. So, if you have a high balance on plastic, use all or part of your RMD to put a dent in your debt. The average credit card rate is 24.43%, according to Lending Tree. So, for every $1,000 you pay off, you can save yourself $244 per year. If you knock out $4,000 in credit card debt, you can avoid $1,000 in interest.
3. Save for a rainy day
If you’re one of the two-thirds (62%) of Americans who told Bankrate.com that they “feel behind on emergency savings,” bulk up your rainy-day fund with a cash infusion from your RMD.
Even though the Federal Reserve has cut its key borrowing rate by three-quarters of a percentage point to a range of 4.5% to 4.75% since mid-September (and might cut rates again later this month), the cash you can earn on your money in the best high-yield savings accounts and certificates of deposit (CDs) still outpaces consumer price inflation (CPI), which measured 2.7% in November. A review of Bankrate.com shows…
Read More: Year End RMDs: Should You Invest, Spend or Donate RMDs?
