What Can You Do With Your RMD?

For those of you over the age of 73, the question of what to do with your required minimum distribution, or RMD, usually comes up around this time of year.

In this newsletter, I just wanted to outline some options for what you can do with your RMD and give you some practical ideas.

But first…

What Exactly is an RMD?

A Required Minimum Distribution (RMD) is the minimum amount you must withdraw from most of your tax-deferred retirement accounts each year once you reach a certain age.

RMD rules generally apply to Traditional, SEP, and SIMPLE IRAs, as well as 401(k), 403(b), 457(b) accounts and other employer-sponsored retirement plans.

If you are the original owner, Roth IRAs are generally exempt from RMDs during your lifetime.

For most people, the RMD age is 73.

The IRS provides a formula for calculating your RMD that’s based on your retirement account balance as of December 31 of the previous year and your age, using a life expectancy factor found in IRS tables.

Fortunately, most financial institutions that hold your accounts will calculate this amount for you.

Important Details

Your very first RMD can be delayed until April 1 of the year after you reach the required age.

Be careful! If you wait, you'll have to take two RMDs that year: your first one by April 1 and your second one by December 31.

This could push you into a higher tax bracket!

After your first year, all RMDs must be taken by December 31 each year.

Failing to take the full RMD amount by the deadline is a big deal and can result in a significant penalty of 25% of the amount you should have withdrawn but didn’t.

This can be reduced to 10% if you correct the missed distribution in a timely manner.

If you have multiple IRAs, you can calculate the RMD for each account and choose to distribute them from any account you prefer.

Please note this does not apply to employer-sponsored accounts such as 401(k)s.

If you have multiple 401(k)s, you would need to take your RMD individually from each account.

If you are still working beyond age 73 and own less than 5% of the company, you can delay your RMD from your retirement plan.

What Can You Do With Your RMD?

The IRS requires you to take the money out, but they don’t dictate what you have to do with it!

Once the RMD is withdrawn for non-charitable purposes, it's taxed just like ordinary income.

After you've paid the taxes, you have two options:

Cover Your Living Expenses

This is the most straightforward use. For many retirees, RMDs simply become a necessary component of their monthly income to cover day-to-day spending.

Reinvest the Funds

If you don’t need the money right away, you can move the funds into a standard investment account to keep them working for you and continue growing your wealth.

You'll owe tax on the RMD, but future growth in the new account will be subject to capital gains tax rules which can be favorable.

Give to Charity

This is a great, tax-efficient option if you don’t need the money, have charitable intent and want to reduce your taxable income.

You can use up to $108,000 (2025) of your RMDs toward a Qualified Charitable Distribution (QCD).

QCDs must be made as a direct rollover (i.e., a check made payable directly from your custodian) to an eligible charity.

The best part? They’re excluded from your taxable income, even without itemizing your deductions.

This frequently makes QCDs a superior option to gifting cash or appreciated stock.

Use Your RMD for Tax Withholdings

If you have different sources of income in retirement, such as a pension, dividends, or even part-time income, one option is to use your RMD to cover tax payments.

You would need to adjust your federal and state withholdings so that they sufficiently cover your tax liability for the year.

This approach can help you eliminate quarterly tax payments and, as a result, simplify your finances and keep more of your funds working for you throughout the year.

What Does This Mean for You?

Let November be your annual reminder to finish taking your RMDs.

Waiting too long into December may cause issues if you want to take advantage of the QCD strategy.

To be on the safe side, before making any major decisions regarding your RMDs or retirement accounts, consult a qualified tax professional or financial advisor.

This will help you understand how these rules specifically affect your unique financial situation.