Are You Reinvesting Your RMD as a Retiree? Here's What You Need to Know.
Key Points
Even if you don’t need the funds, you’re required to make withdrawals from your tax-deferred retirement accounts at age 73 or 75.
There are multiple places to reinvest RMD funds.
To simplify the process, it may be a good idea to automate transfers.
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If you don't anticipate needing your required minimum distributions (RMDs) at age 73 (or 75 if you were born in 1960 or later), reinvesting makes sense. Doing so gives your money more room to grow.
RMDs don't have to be a thorn in your side as long as you have a plan to make the most of them.
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Three important things to keep in mind
There's nothing especially tricky about reinvesting RMDs. However, it's important to keep small details in mind. For example:
- Failure to take your RMDs when they're due can lead to costly penalties.
- You can't avoid RMDs by reinvesting the money back into a tax-deferred account.
- Once the money is withdrawn, it becomes taxable income. That means you'll be using after-tax dollars to reinvest.
Tax considerations
It's difficult to outrun taxes in retirement. And because RMDs increase your taxable income, they may:
- Push you into a higher tax bracket.
- Impact how much tax you pay on Social Security benefits.
- Increase your Medicare premiums.
- Affect your eligibility for specific tax credits or deductions at tax time.
Ways to reinvest RMDs
Once the RMD is withdrawn and taxes have been paid, here are some of the ways RMDs can be reinvested:
Roth IRA contributions (if you meet eligibility requirements)
If you have earned income and meet the contribution limits, consider using cash to fund a Roth IRA to gain tax-free growth and tax-free withdrawals later.
Taxable brokerage accounts
Another option is to buy stocks, exchange-traded funds (ETFs), or mutual funds. You'll be responsible for paying taxes on interest, dividends, and realized capital gains, but the funds are generally easy to access and can offer long-term growth potential.
Annuities or insurance products
Each option involves fees and can be incredibly complex, but if you can work through those challenges, they can also provide guaranteed income.
Savings or certificates of deposit (CDs)
Both are appropriate choices if you're more concerned with capital preservation and liquidity than growth.
Whichever option you choose, make sure it has the potential to grow faster than inflation.
Keep it simple
These three steps can help you remain in control without spinning your wheels:
- Automate: Just as you automate your monthly bills, set up automatic transfers from your tax-deferred accounts to your brokerage or bank when RMDs are due.
- Review: Set aside time to review your plan annually, especially if your RMDs grow or tax rules change.
- Seek advice: Meet with a fiduciary financial advisor to determine the best way(s) to reinvest your money.
Reinvesting RMDs can turn a mandated withdrawal into a wealth-sustaining tool, helping you make the most of the accounts you've worked so hard to build.
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