Key Points
Once you've paid taxes on funds withdrawn from an RMD, you're free to use that money in any way you'd like.
One option is to reinvest the money in a Roth IRA, where it can continue to grow.
If it's been a while since you thought you needed life insurance, you may find that purchasing a new policy is a smart way to add to your estate.
- The $23,760 Social Security bonus most retirees completely overlook ›
Ah, required minimum distributions (RMDs). Love 'em or loathe 'em, they're a way of life for you if you have a tax-deferred retirement account and you've reached the age of 73. RMDs are the government's polite way of telling you that you owe taxes on money you invested tax-free.
If you use your RMDs to pay everyday living expenses, you probably don't see them as a burden. However, if you don't "need" RMDs, the requirement to pull money from a growing portfolio may be a bit of a pain.
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Reinvest the funds
There's no rule saying you can't withdraw your RMD, pay taxes on it, and reinvest it in something new. Maybe you've had your eye on a specific company or industry that you'd like to invest in, or you want to slide the money into a Roth IRA.
Although you'll have to pay taxes on the withdrawal before reinvesting it in a Roth IRA, that money will be available for you to withdraw tax-free later down the road. Let's say you're 73 and your parents lived into their late 80s or 90s. If you're at all concerned about outliving your money, a Roth IRA is a nice way to provide you with the comfort of knowing you have another source of cash available when you need it.
If you don't need it right now, that's great. That gives the funds time to grow through the power of compounding.
Invest in life insurance
Granted, life insurance won't directly benefit you, but it sure can become an important part of your estate plan. Let's say you plan to leave the entirety of your estate to your immediate family members. However, there are a few charities you'd like to remember, or you have nieces and nephews you'd like to leave something to.
The proceeds of the life insurance you purchase can be earmarked for those charities and/or people you care about, while the bulk of your estate will still go to your current beneficiaries.
Although the recipients of your life insurance policy won't have to pay taxes on the proceeds of your policy, they will have to pay taxes on any interest earned on the policy. It's a pretty sweet deal all around.
You can expect to pay more for life insurance now that you're older, but if using your RMD to pay the premiums doesn't cut you short, it's an alternative worth considering.
If you don't rely on your RMDs, you're in rarified company. However, if RMDs have become a thorn in your side, why not get creative and use them in a way that either benefits you in the future or benefits the people you love?
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