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

Is the Internal Revenue Service forcing you to make a withdrawal from an IRA this year? If you'll be 73 years old or older at any point in 2025 and you happen to have some money sitting in a non-Roth retirement account, then the nation's tax agency almost certainly will be. It's called a required minimum distribution (RMD), in fact.

Just because you've now got money coming out of a retirement account, however, doesn't mean you have to stop making the most of what you've saved up. There are still plenty of actions you can take to make more of your money do what you'd like it to keep doing.

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With that as the backdrop, here's a closer look at five ways of being strategic with your RMD this year -- or any year.

1. Allocate (or reallocate) with taxability in mind

To date, none of the gains or investment income reaped within your IRA has been taxable, so it didn't entirely matter what you owned inside this account. For the portion of this money now coming out of your IRA, though, it will. Not only are required minimum distributions taxable events in and of themselves, reinvesting this money will also create an eventual tax liability.

So, be smart about what you do with it. If you need it to produce dividend income right away, know that these dividends will be taxable as income in the year in which they're paid. If you don't need income and would like something a bit more tax-cost-effective, reasonably safe growth stocks might make more sense. This capital appreciation won't become taxable until you decide to sell these assets.

The point is, your tax situation will continually change from here, exposing you to more potential taxation that simply wasn't a factor before. Plan accordingly.

2. Make a qualified charitable distribution, or QCD

If it was always your plan to donate your IRA money to charitable causes, the IRS allows for qualified charitable distributions (QCDs) from retirement accounts that still satisfy RMD rules.

As the name suggests, qualified charitable distributions are direct transfers of cash or assets from an IRA to a legitimate charity. Not only will QCDs that are big enough fully meet your required distribution for any given year, they may also make it easier and more tax-cost-effective than personally accepting these funds first and then passing them along to the charity of your choice. This year's qualified charitable distribution cap is $108,000 per person.

And yes, you can make a QCD as well as take an ordinary (taxable) distribution in the same calendar/tax year, as long as you take enough between the two to fully meet your minimum requirement. Just know that you'll typically want to facilitate your qualified charitable distribution first before pocketing any remainder of your required minimum distribution. Otherwise, you'll risk running afoul of the IRS's "first dollars out" rule that could potentially tax the entirety of both withdrawals.

3. Use this distribution to pay the taxes on a Roth conversion

Except for withdrawals of rarely seen after-tax IRA contributions, any and all required minimum distributions that you accept instead of donating them to charity are treated like taxable income. It's a drag. But, you can't get around it.

If you'd like to bite the proverbial bullet and go ahead and pay taxes on more of the money currently sitting in your IRA, though, consider converting some or all of your retirement account to a Roth IRA.

It's not a decision to be taken lightly. Not only is it not reversible once done, it's taxable in its entirety for the year in which the conversion is completed. That means you're going to have to come up with a bunch of money to pay the resulting tax bill; you may even get bumped into a higher tax bracket. You also generally can't withdraw this money for a period of five years following the conversion without being penalized for doing so.

It may still be worth it to you, though, particularly if you've got the cash available to cover the tax bill, and market weakness has temporarily pulled the total value of your IRA down (thus decreasing your total tax liability at that point in time). If you're taking an RMD this year, though, you'll have at least a decent-sized chunk of cash to work with, plus you'll never have to worry about required minimum distributions again. See, not only are distributions from Roth accounts not taxable after five years, but they're never subject to RMDs.

Again, though, think this possibility through very carefully. You might also want to talk it over with a qualified financial professional who's familiar with your personal situation.

4. Wait for the market to be up rather than down

It might make sense to complete a Roth conversion while the market and the value of your conventional IRA is down. If you're only interested in withdrawing the minimum amount of money from your retirement account each year, however, there's a case to be made for waiting until the market and your account's value is up.

See, the amount of any particular year's RMD is determined by the prior year's ending value. Once it's set, though, that dollar amount is etched in stone for the following 12 months. That is to say, you've got until Dec. 31 of any year to complete the required minimum distribution established at the end of the previous year.

What's not etched in stone, however, is your retirement account's value over the course of that 12-month stretch after your RMD is calculated. If you'd like to leave proportionally more of your money in your IRA, taking your required minimum distribution when the market is up and your assets' values are elevated will help you do so.

Just don't get too picky with this strategy. Trying to pinpoint a market's exact peak is still an impossible endeavor. "Good enough" is arguably good enough.

5. Put it back into an IRA

Finally, as crazy as it sounds, even if you're being required by the IRS to take taxable withdrawals from an IRA, you're still simultaneously allowed to put money back into a retirement account.

Not every retiree will be able to do so. In fact, most probably won't. Only work-based wages are eligible to be contributed to an IRA, and most people aged 73 or older are no longer employed. If you are one of the few people of this age that's still working, though, IRA contribution rules have no age limit.

Although there's no means of directing RMDs directly back into a retirement account (nor would you want there to be, since your required minimum distribution is unlikely to be the exact amount of money you're looking to put back in an IRA for that same year), the IRS doesn't care if it's your RMD money that makes it possible for you to also make a contribution back into a conventional IRA. Just be prepared for a few more entries and calculations than average when you're filing your annual taxes.

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