What Are 3 Strategic Ways for Retirees to Use Their Required Minimum Distribution (RMD)?

Are you going to be 73 years old (or older) at any time this year? And if so, do you have any money sitting in one or more non-Roth IRA accounts? If the answer to both of these questions is yes, then you'll soon be withdrawing funds from those accounts, whether you need to or not. Those funds will be your required minimum distributions, or RMDs.

That said, you're not required to take this money and park it in a checking account. Indeed, you should be thinking far more strategically about your RMD.

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The skinny on required minimum distributions

Just as the name suggests, required minimum distributions are required annual withdrawals from ordinary IRA accounts beginning in the year you reach 73 years of age. Although you have until April 1 of the year after you turn 73 to take your initial RMD, you must take subsequent RMDs by the end of each calendar year.

The "minimum" in question is a function of your age and the balance of any relevant accounts as of the end of the prior year. For most people, your first year's RMD is worth roughly 3.77% of previous year's closing balance, for instance, but this percentage grows as you age. For 80-year-olds, it's 4.95%. For the year you hit 90, it's 8.20% of the account balance. Your broker or IRA's custodian will provide you with the paperwork and information needed to determine and complete your RMD.

There are some exceptions to RMD rules, by the way. Chief among them is the fact that Roth retirement accounts aren't subject to them. Since contributions to Roth accounts aren't tax-deductible and distributions from them aren't taxable, the IRS has no benefit in forcing you to make withdrawals from these vehicles.

Another exception is if you're still working and participating in an employer-sponsored 401(k) plan -- you're typically allowed to postpone distributions from such accounts until you officially retire and stop making contributions to them.

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Then, there are some other more nuanced rules to be aware of. For example, if you happen to own more than one funded traditional IRA, your overall required distribution can come from any combination of them you like -- the IRS only cares about the aggregate amount withdrawn from these accounts. That's not the case with multiple 401(k) accounts though. You must take the specific RMD calculated for each and every one of these workplace retirement accounts (which is another reason to move this money into a rollover IRA account once you leave a job, since rollover IRAs aren't subject to such nitpicky distribution rules).

Also bear in mind that while your yearly RMD calculation represents a minimum, you can certainly take more than this amount. Just remember these withdrawals are treated by the IRS as taxable income -- the more you take, the bigger the tax bill.

Three strategic ways to make your RMD work for you

So how might a retiree get more bang for each buck of their RMD, so to speak? Being smart with any cash or investments is obviously always a good answer, but here are three specific ideas that will apply to retirees who find themselves in this particular situation.

1. Keep your tax liability to a minimum with a QCD

Are you looking to make tax-deductible charitable contributions with some of your retirement savings? Any such gift will lower your total taxable income, but there are limits to these deductions. And for some particularly generous people, the limits for these tax deductions may be too low.

A qualified charitable distribution (or QCD), however, helps sidestep at least some of these issues while still helping you meet your particular distribution requirement for any given year. By transferring assets directly from an ordinary retirement account to a qualified charity, you are given credit toward your RMD for the year in question without creating any additional taxable income. This option is popular simply because the limits on QCDs are so high. For tax year 2025, an individual can gift up to $108,000 by classifying an ordinary IRA's distribution as a QCD. For a married couple that cap is doubled to $216,000.

Of course, simply making a charitable gift as a means of reducing your tax liability isn't enough reason on its own to make this choice. If you need some or all of your RMD to live on, by all means, just pay the taxes due on your distribution.

2. Use it toward the tax bill resulting from a Roth conversion

Perhaps you've been fortunate enough in life to not only tuck away a nice amount of money in a retirement account but also not really need any single year's required minimum distribution to help cover living expenses. If this sounds like you, there's an argument to be made for converting your existing ordinary IRA into a Roth IRA.

There's a catch to this switch, though, and it's a big one. Doing so will incur the income tax bill that's otherwise been postponed until now. Indeed, the more IRA money you convert to a Roth IRA, the more in taxes you'll owe at the time. That's why it might be wise to make this shift in stages, just to make sure you don't push your income into the next-higher tax bracket for any given year.

But what's this got to do with a required minimum distribution you don't actually need now or anytime soon? Even if it won't cover all of the bill, your RMD can be applied toward the additional income taxes you'll owe on the amount converted to a Roth. That might sting a bit in the short run, but it also gets at least some of your ordinary IRA's tax liability out of the way once and for all. Again, Roth IRAs aren't subject to RMD rules.

3. Reinvest it with the new portfolio structure in mind

You may also choose to take a portion of any required distribution and reinvest it.

Just bear in mind that while your holdings grew tax-deferred in the retirement account, once taken out, any future dividends or interest are taxed annually. Capital gains on these investments will also be subject to taxes if you sell them.

That's not necessarily a bad thing, to be clear. If you're after dividend income, for instance, an RMD can be invested in quality dividend-paying stocks. Subsequent dividends will represent taxable income, but this option allows you to keep your less predictable growth investments inside your tax-deferred retirement account, where you can buy and sell stocks without worrying about incurring capital gains taxes until you withdraw the funds.

Whatever strategy you take with your RMD, you must carefully consider the implications for your tax bill, budget, portfolio, and other retirement goals.

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