Don't Need Your Required Minimum Distribution (RMD) Right Now? What Can You Do With the Cash Influx?

Key Points

• The IRS eventually comes looking for the tax revenue it didn't get to collect earlier on the money invested within IRAs and other tax-deferred accounts.

• Just because you withdraw money from a tax-sheltered retirement account doesn’t mean it can’t continue providing value, or continue growing.

• There's a financial maneuver that can help negate your need to make future RMDs.

• The $23,760 Social Security bonus most retirees completely overlook ›

Are you going to be 73 years old (or older) at any point in 2025? If so, whether or not you need it -- or even want it -- you will be legally required to start taking money out of most types of tax-deferred retirement accounts you may own. These withdrawals are called required minimum distributions, in fact, or RMDs -- and failing to make those taxable withdrawals each year before the annual deadline can result in decent-sized penalties.

Don't stress out if you just don't need this cash at this time, though. While you can't refuse to withdraw it, you can still do constructive things with it outside of your IRA. Here's a review of your four best options.

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But first things first.

What's an RMD?

If you've already been through your first required minimum distribution, then 2025's RMD isn't your first rodeo. If you're unfamiliar with them, though, here's the deal.

All the money that's been growing tax-free inside your (non-Roth) IRA, 401(k), or similar account? The IRS eventually wants its cut. The federal government's revenue-collection arm figures that 73 years of age is about as late in life as it wants to let you keep this money completely untaxed. And once you start, you'll take these required minimum distributions every year for the rest of your life.

But what's the minimum? It varies with your age. When you're 73, you'll only need to withdraw about 3.77% of your retirement account's value as of the end of the prior year. The proportion gets progressively larger as you age, though, reaching 50% of the prior year's closing value at the rarely seen age of 120. Your brokerage firm or your account's custodian will supply you with the information needed to determine your RMD, and in many cases can figure it out for you. Otherwise, refer to the IRS for instructions.

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If you own more than one retirement account, that's OK. You can mix and match your withdrawals from the same kinds of retirement accounts to come up with a sum-total RMD figure, and then make the withdrawal from just one of these accounts, or portions from each. The IRS only cares about the total amount it's owed -- not where the money comes from. However, you can't mix and match among different kinds of retirement accounts, like a 403(b) and a traditional IRA. Both of them do have RMDs, but you'll have to handle each category separately. You can only combine like-categorized retirement accounts for RMD calculation and withdrawal purposes.

There's one exception to this: 401(k) accounts. If you happen to have more than one 401(k), you need to take your calculated RMD for each one from that one.

As for timing, your very first required minimum distribution doesn't need to be completed until April 1 of the year after you turn 73. Past that point, these withdrawals are supposed to be completed by the end of the calendar tax year. That means if you wait to make your first one, you may end up taking two years' worth of RMDs in the year you turn 74.

Options

Suppose you don't actually need all of that money in that year, though. No problem. While you'll still need to make these withdrawals, there are several options for what you may want to do with the cash influx, some of them specific to IRAs.

1. Give it away (tax efficiently)

You can always give money to charitable causes. And, while there are limits, donations to legitimate charities are at least somewhat tax-deductible.

If you're over 70 and a half and are willing to transfer cash or assets directly from your IRA to a charity, though, tax-deductibility limits are much higher. Specifically, by categorizing your RMD as a qualified charitable distribution (or QCD), you can take as much as $108,000 worth of an IRA distribution that would have been considered your taxable income (or up to $216,00 for a married couple) and directly transfer it to a charitable cause -- and that maneuver will still satisfy your minimum distribution requirement. You can't do this with 401(k)s or similar accounts. Contact the charity in question for instructions on how they can receive this gift, and then confirm it for your record-keeping and documentation purposes.

2. Tuck it away for a rainy day

Just because you don't need this money right now doesn't necessarily mean you want to get rid of it altogether, of course. The day may well come when you do need it.

If that's the case, leaving a sizable wad of cash in a checking or savings account is an option, but arguably not your best one. These accounts pay little to no interest. If you're willing to make a minimal amount of effort to shop around, you can find a high-yield money market fund you like instead. Such accounts are currently paying in the ballpark of 4%, and almost all brokerage firms and most online banks offer them.

Now, moving money into and out of such funds involves buying and selling just like an ordinary mutual fund. So, to convert that money back to something liquid and cash-like will take one full business day. It's certainly worth the trouble, though, for a good interest rate on the kind of money you're likely to be reallocating with an RMD.

3. Invest it -- or reinvest it -- with its new taxable status in mind

Most people slated to collect a required minimum distribution who don't actually need the money at that time are likely just going to reinvest it.

However, if you're only going to repurchase the same investments you sold to facilitate the RMD, you need not bother. You can simply request a transfer of assets from an IRA and into an ordinary brokerage account. Just instruct your broker/custodian to do what's called an in-kind transfer. It may take an extra day or two to complete, but you'll still get a precise distribution value figure for the day the transfer was officially done.

That being said, while you're moving things around anyway, you might want to use the opportunity to make some smart changes to your portfolio. Just consider the new taxable status for any freed-up money or assets. Nothing that ever happened within your IRA was a taxable event. Now, everything this money could become presents a potential tax liability. If you want to keep your tax bill to a minimum, you probably won't want to invest your entire RMD in dividend stocks. While they're riskier, buy-and-hold growth stocks are also rather tax-efficient.

4. Start saving for a Roth conversion

Finally, if you know taking taxable withdrawals out of your retirement account every year is going to be more of a drag than you care to deal with, you've always got the option of converting an ordinary IRA into a Roth IRA -- Roths aren't subject to RMDs.

The downside to this move is that when you convert money from an ordinary IRA into a Roth, all the taxes on this withdrawal come due at once. This can get expensive, especially if doing so bumps you into a higher tax bracket for the year. That's why many people who opt for Roth conversions perform them over the course of multiple years, completing the conversion in tranches, each of which is a relatively small income-taxable event. Assuming you'd rather not leave any money out of the newly converted (but still tax-deferring) Roth when you don't have to, you can cover this tax bill with other funds ... including your RMD money.

Just bear in mind that a Roth conversion doesn't satisfy your RMD for that year. And, paying taxes on one doesn't negate the tax bill for the other. Every year's required minimum distribution is already determined at the end of the prior year, and is owed whether you do a conversion that year or not. If you like this idea, you'll simply want to convert as much money as possible as quickly as possible to keep your RMDs -- and the number of years you must take them -- to their lowest-possible minimum.

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