Are You Reinvesting Your RMD as a Retiree? Here's What You Need to Know.

If you’re turning 73 this year or shortly thereafter, the days of being able to leave your retirement savings untouched may be dwindling. If you have your money in a traditional IRA or 401(k), it’s time to start planning for required minimum distributions, or RMDs.

For some retirees, RMDs are no big deal. If, for example, you’re planning to withdraw $12,000 a year from your savings and you’re on the hook for a $12,500 RMD, you’re basically being forced to remove an extra $500 – not a tragedy.

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RMDs can be more frustrating for people who don’t need the money at all and would rather let their savings grow. But in that case, you should know that there’s no requirement to spend your RMD. You can absolutely reinvest that money and put it back to work. If you’re going to do that, here are a few things to know.

1. You’ll need to prepare for tax consequences

Perhaps the biggest downside of RMDs is that they trigger taxes. That’s something you’ll need to plan for. In addition to federal taxes, you may be looking at state taxes, depending on where you live.

Your RMD could also push you into a higher tax bracket, depending on your total income. It could also spell the difference between having to pay taxes on your Social Security benefits or not, as well as having to pay more for Medicare or not.

2. You can’t roll the money into another tax-advantaged retirement account

Once your take your RMD, you can put that money into another investment account. But it can’t be a tax-advantaged retirement account. For example, you can’t take an RMD and roll it into another. That said, if you have earned income, you can contribute the equivalent of your RMD to an IRA if you meet the requirements.

For example, say you have to take a $5,000 RMD and your part-time job pays you $5,000 a year. You’ll have to take your RMD and pay taxes on it. But you can also contribute $5,000 to an IRA based on your wages. However, you may want to favor a Roth IRA to avoid – wait for it – more RMDs.

3. You can still snag some tax breaks on your money

The right investment strategy could help you score some tax breaks in the course of reinvesting your RMD. If you’re looking for relatively stable income and a low-risk investment, consider municipal bonds.

The interest these bonds pay is always exempt from taxes at the federal level. And if you buy municipal bonds issued by your state of residence, you can generally avoid state and local taxes as well.

Don’t feel compelled to reinvest your RMDs

If you’re not thrilled about having to pull money out of your retirement account, know that reinvesting your RMDs is absolutely an option. But before you do that, consider whether you need to.

If you have plenty of remaining savings, you may want to use your RMDs to support charities you care about, travel, improve your home, or buy things you wouldn’t otherwise treat yourself to. There’s no need to feel bad about spending that money. And splurging a bit might soften the blow of having to take those withdrawals.