What Are 6 Strategic Ways for Retirees to Use Their Required Minimum Distribution (RMD)?

You may not want to take any money out of your retirement accounts, but the government doesn't leave you a lot of choice in the matter once you turn 73. That's the age when you typically have to start taking required minimum distributions (RMDs) -- mandatory annual withdrawals from all tax-deferred retirement accounts, except for any associated with your current employer if you're still working.

Failing to take your RMDs results in a 25% penalty on the amount you should've withdrawn, and that's often worse than just taking the RMD and paying your taxes in the first place. Fortunately, there's a lot you can do with your RMD funds, including the six things listed below.

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1. Cover your living expenses

The most obvious use for your RMDs is just paying for your everyday living expenses. If you don't need them this month, you can always hold on to them for next month or for a few months down the road.

2. Build an emergency fund

If you don't have an emergency fund, use your RMD to start one. Your emergency fund is cash meant to help you cover unplanned expenses, like an ER bill or a home insurance claim. Ideally, you want three to six months of living expenses in your emergency fund.

You typically want to keep it in a high-yield savings account or somewhere you can access it easily. You don't want your emergency fund invested because you never know when you'll need the cash. If an unexpected cost comes up when your investments are down, you'd have to sell more of your assets to get the cash you need.

3. Reinvest it in a taxable brokerage account

The government requires you to take RMDs out of your retirement accounts, but there's no rule saying you have to spend them. You could reinvest that money in a taxable brokerage account and leave it there for as long as you'd like.

This won't give you the same tax benefits as a retirement account. But if you hold your investments in a taxable brokerage account for at least one year before selling, you'll only have to pay long-term capital gains tax rates on your earnings. These are more favorable than short-term capital gains tax rates or ordinary income tax rates.

4. Pay for the taxes on a Roth conversion

You don't have to take RMDs from Roth IRAs. You fund these accounts with after-tax dollars, and withdrawals in retirement are generally tax-free, so the government has no incentive to force you to take your money out.

You can move funds from a tax-deferred retirement account, like a traditional IRA or 401(k), to a Roth IRA, but you have to pay taxes on the converted amount in the year of the conversion. If you do a Roth IRA conversion now and use your RMD to help you cover the associated taxes, you could reduce the RMD you have to take next year.

5. Make a qualified charitable donation (QCD)

The IRS won't tax you on your RMD funds if you donate them to a charity. This workaround is called a qualified charitable donation (QCD). But there are a few rules. First, your retirement account trustee must send the money directly to the charity. It can't pass through your hands first. Second, your donation can't exceed $108,000.

Check the IRS's Tax-Exempt Organization Search tool to see which organizations you can make a QCD to. You must complete your QCD by Dec. 31, 2025, unless this is the first year you're required to take RMDs. Then, you have until April 1, 2026, to make your first RMD or QCD.

6. Give it to your heirs

If you're looking to pass along money to your heirs after you're gone, consider investing in a life insurance policy. This money typically passes tax-free to your beneficiaries after you're gone.

You could also put the money into a 529 plan for a child or grandchild. This could help them pay for higher education costs so they don't have to take out student loans.

It's also fine to use your RMD for more than one thing. You might spend part of it on living costs and then save the rest in an emergency fund or make a QCD. Figure out what works for you. Then, make sure you take your RMD out of your account by the Dec. 31 deadline.

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