I Used to Think RMDs Were a Terrible Thing. Here's Why They're Not So Bad.

For years, I've been telling myself to diversify in the context of retirement savings. And I don't mean branch out into different asset classes or sectors of the market. I'm already doing that.

Rather, I have all of my retirement savings in a traditional 401(k) and IRA. And I've been meaning to build some Roth savings, too.

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But it's been hard to give up the tax breaks that come with funding a traditional IRA or 401(k). And given my current tax bracket, I'm not even sure a Roth account makes sense for me at this point.

Of course, the problem with having all of my retirement savings in a traditional 401(k) and IRA is that my withdrawals will be taxable. Not only that, but I'll also eventually be forced to take required minimum distributions (RMDs) each year.

But I'm less bothered by the idea of having to take RMDs today than I was in the past. Here's why I think they're not so bad, provided you plan for them carefully.

Why RMDs exist

You may be wondering why the IRS feels the need to tell you when to tap your retirement savings. And the reason boils down to tax revenue.

Remember, you don't pay taxes on the money you put into a traditional IRA or 401(k). Therefore, the IRS wants an opportunity to collect taxes on that money eventually. Plus, the IRS doesn't necessarily want traditional retirement accounts to turn into estate-planning tools for the wealthy.

If RMDs didn't exist, well-off savers could simply accumulate large sums of money in these accounts and then pass them along to their heirs. That's not the intent behind IRAs and 401(k), and RMDs are a way to help ensure that they're used to actually fund people's retirements.

Why RMDs don't bother me like they used to

I used to think RMDs were nothing more than a giant pain. After all, the money in my retirement savings is, well, mine. Why should the IRS dictate when I take withdrawals? But I've since realized that RMDs can sort of be a gift.

See, I'm not the sort of person who spends money easily. But if I'm forced to take withdrawals from my retirement savings, it gives me an opportunity to treat myself to things that could enhance my life. And you can do the same.

Rather than get upset about RMDs, you can calculate your withdrawal each year and tell yourself, "This is my travel money" or "Here's how I'll pay for theater tickets and restaurant dinners throughout the year."

Your RMDs could also be your ticket to home improvements, new furniture, or stress-free gifts to your grandchildren. The point, either way, is that if you come up with a purpose for your RMDs, you may feel less upset about them and more excited about taking them. Instead of feeling like you're incurring a tax bill for nothing, you're incurring it for a reason -- to enjoy the money you worked hard to save.

Of course, RMDs do have to be planned for carefully. Those withdrawals will count as taxable income, and they could push you into a higher IRS bracket.

They could also have additional consequences, such as having to pay taxes on your Social Security benefits. And if your RMDs are substantial, they could drive your Medicare premium costs up in the form of income-related monthly adjustment amounts, or IRMAAs.

But all told, RMDs don't have to be a terrible thing if you know what to expect and work with a financial planner or accountant to mitigate the tax consequences. You may even find that you look forward to taking that money out of your savings to do the things you've always wanted.

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