3 Ways to Use Your Required Minimum Distribution (RMD) Strategically in Retirement

Required minimum distributions (RMDs) -- the mandatory annual withdrawals seniors have to take from most retirement accounts beginning in the year they turn 73 -- can sound like a big deal. After all, if you fail to take yours, you could face a 25% penalty tax on the amount you should have withdrawn. That said, many retirees already meet their RMDs through the routine withdrawals they make during the year.

This isn't the case for everyone, though. Sometimes, you take your RMD just to avoid the penalty tax, but you don't actually need the money right away. If you find yourself in that boat, here are three things you can do to make the most of your unused RMD.

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1. Put it toward future living expenses

If you just withdrew your 2024 RMD, you can put that money toward 2025 living expenses. Keep your funds in a high-yield savings account or a short-term certificate of deposit (CD) to help them grow until you need them.

A potential drawback to this approach is that you might find yourself in a cycle where you fail to withdraw enough from your retirement accounts each year to meet your RMD, so you have to make last-minute withdrawals at the end of the year to avoid penalties.

If you're fairly confident that you have enough money to last the remainder of your life, you could use your extra money to treat yourself. Perhaps you make a big-ticket purchase or go on a vacation you've always wanted to take. Then, you can continue making retirement account withdrawals as needed to cover your living expenses and meet your RMDs.

2. Reinvest your RMD

The whole idea behind RMDs is to force you to withdraw your savings from your tax-advantaged retirement accounts so you can give the government its share. But after you've done that, the government doesn't care what you do with your remaining funds.

If you're retired, you won't be able to put that money back into a retirement account because you typically need earned income to contribute to one. But there's nothing stopping you from putting your cash in a taxable brokerage account.

Here, you're free to invest your money however you like so it can continue to grow until you need it. You will owe taxes on your earnings when you sell your investments, but if you hold them for a year or more, you'll pay long-term capital gains tax. The highest tax bracket here is only 20% compared to 37% for short-term capital gains tax and income tax, so this could save you quite a bit.

3. Make a qualified charitable distribution (QCD)

If you truly have no need of the cash and you don't want your RMD to raise your taxes, a qualified charitable distribution (QCD) might be your best option. This is where you donate your RMD to a qualifying charitable organization. It's important the money goes directly from your account to the charity without ever passing through your hands. Contact your retirement plan administrator if you're unsure how to do this.

If you opt for a QCD, the money still comes out of your account, but the IRS won't count it when calculating your taxable income for the year. Plus, you get the benefit of knowing you contributed to a good cause.

It might be too late for most retirees to do this with their 2024 RMDs. You generally have to take RMDs by Dec. 31. However, if you turned 73 in 2024, you have until April 1, 2025, to take your first RMD, so a QCD may still be an option for you. Even if you don't do this for 2024, it's something to keep in mind for future years.

The best move for you to make with your RMD may vary by year, and that's OK. You may also decide to split your RMD between several of these, perhaps reserving a portion for future expenses and either reinvesting or donating the rest. There's no wrong answer here, as long as you're comfortable with the financial implications of your choice.

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