10 Strategic Ways for Retirees to Use Their Required Minimum Distribution (RMD)

You may not realize it, but if you're saving for retirement with some tax-advantaged retirement accounts such as IRAs and 401(k)s, some of those accounts may require that you take required minimum distributions (RMDs) once you reach age 73.

More specifically, the Internal Revenue Service (IRS) requires us to take RMDs annually from accounts such as traditional IRAs, SEP IRAs, and SIMPLE IRAs annually once we reach the age of 73. A typical RMD withdrawal will count as taxable income to you -- so it's smart to plan for it when you're devising your retirement plan.

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Take some time to think through how you want to use your RMD each year, because it can be several thousand dollars, and it may help you in multiple ways. Here are 10 strategies to consider.

1. Automate it

Failing to take your RMD on time is a costly mistake -- potentially costing you thousands of dollars -- so make sure to stay on top of this. You may be able to shift the responsibility to your brokerage, though -- because many good brokerages allow you to set up automatic withdrawals annually for your RMDs -- and they'll even calculate the amount for you.

2. Use it for living expenses

An obvious use for your RMD is simply for living expenses. Social Security isn't likely to provide all the income you need in retirement, so let your RMDs help you pay for food, gas, utilities, and more.

3. Pay down debt with it

If you're carrying debt, especially high-interest rate debt such as debt from credit cards, it's smart to pay it all off as soon as you can. Otherwise, you may end up digging yourself deeper into debt. Or you may simply be paying thousands of dollars in interest when you might be using it for more pleasant things instead.

4. Pay down your mortgage

Think about your home loan, too. Many people would love to enter retirement without a mortgage hanging over their heads. Even if you've already retired, you might deploy your RMD as an extra payment against the principle on your loan, which can shorten the life of the loan. To be even more aggressive about it, you might use that money to refinance your mortgage.

5. Save it in an emergency fund

Do you have an emergency fund ready? Unless you're financially independent, you should have one, full of money you'd need to keep yourself afloat for at least three months in case your household faces a financial blow -- such as job loss, a costly health setback, and/or an expensive home or automotive repair. Your RMD could be used to set up or augment an emergency fund.

6. Park it in a fund for healthcare expenses

Healthcare costs in retirement are probably more expensive than you think. According to Fidelity, a 65-year-old person retiring in 2024 could expect to spend $165,000, on average, on medical and healthcare expenses throughout their retirement -- not including long-term care, over-the-counter medications, and most dental services. A married couple, then, might be facing an average total cost of $330,000. You might then park your RMD in a special account, saving up for possible future healthcare expenses.

7. Reinvest it

What else can you do with your RMD? Well, perhaps reinvest it!

You could take the money and plunk into another IRA or into a regular, taxable brokerage account. You might use it to invest in dividend-paying stocks, in order to set up additional retirement income for yourself. Or maybe just move the money into a high-yield money market account.

8. Take the RMD in kind

Here's an idea you may not have thought of: You might take your RMD from your retirement account without selling any stocks to do so. Instead, you'd do an "in-kind" withdrawal, transferring shares of stock out of your account and into another one. This is a good option if you really don't want to sell your shares -- but you do need to read up on this method before employing it, as there are some pitfalls to avoid.

9. Let it help you execute a Roth conversion

You may know about Roth conversions -- where you take money in a traditional IRA and move it into a Roth IRA. It can be a smart thing to do, since Roth IRAs allow you to take money out tax-free in the future, if you play by the rules.

But the amount you convert does get taxed upon the conversion, and you might not have enough money to pay that tax bill. Enter your RMD! It could be used to cover some or all of that tax bill, helping you execute a conversion.

10. Make a qualified charitable distribution

Finally, if you're financially comfortable and don't really need that RMD, you might be generous and donate it. Don't just take out the money and then write a check to a charity, though -- as that will result in a tax bill for you and a smaller donation for the charity. Instead, make a qualified charitable donation (QCD).

Your brokerage or account administrator can help you with this, but basically, you'll have the amount of your RMD sent directly to a qualified charity without your ever laying hands on it. Doing so means it will not count as taxable income to you. (This strategy is only available for RMDs from IRAs, though.)

Those are 10 solid things you might do with your annual RMDs. Think them over and see which one(s) make the most sense for you. And as you prepare for your future, be sure to have a solid retirement plan and work on executing it well.

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