What Should You Do With Your RMD Money?

Required Minimum Distributions (RMDs) represent mandatory withdrawals from tax-deferred retirement accounts, such as traditional Individual Retirement Accounts (IRAs) and 401(k)s. The Internal Revenue Service (IRS) mandates these distributions to ensure that retirement savings are eventually taxed, preventing them from serving as indefinite tax shelters or wealth transfer vehicles. For individuals who turned age 73 after December 31, 2022, RMDs generally commence at age 73, while those who reached age 72 before this date began distributions at 72. These withdrawals are typically subject to ordinary income tax in the year they are received.

Using RMDs for Personal Needs

Required Minimum Distributions can provide a valuable source of income to meet various personal financial requirements. Many individuals use these funds to cover daily living expenses, including housing costs, utility bills, and groceries, which helps maintain their lifestyle during retirement. Beyond essential needs, RMDs can also fund discretionary spending, allowing for personal enrichment activities such as travel, hobbies, or educational pursuits.

A strategic use of RMD money involves reducing high-interest debts, which can significantly improve financial health. Debts like credit card balances, often carrying annual percentage rates (APRs) between 21% and 28%, or personal loans with rates potentially reaching 35%, can quickly accumulate substantial interest. Using RMDs to pay down these costly obligations can lead to considerable savings on interest payments over time.

Additionally, RMD funds can be directed toward establishing or bolstering an emergency fund. An emergency fund serves as a financial safety net, providing cash reserves for unforeseen expenses like car repairs, home maintenance issues, or unexpected medical bills. Financial professionals often suggest maintaining three to six months’ worth of living expenses in an emergency fund to avoid relying on high-interest debt or liquidating other long-term savings during unexpected financial challenges.

Investing Your RMD

For those who do not require their entire Required Minimum Distribution for immediate personal expenses, reinvesting the funds can be a prudent strategy to continue wealth accumulation. One common approach involves placing RMD money into taxable brokerage accounts, which can hold a variety of investments such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs). While these accounts offer investment flexibility, any capital gains or dividends generated are subject to taxation.

Lower-risk, liquid investment options are also available for RMD funds, providing a balance between growth potential and accessibility. Certificates of Deposit (CDs) offer fixed interest rates for a specified term, while high-yield savings accounts typically provide variable rates that are significantly higher than traditional savings accounts.

Another consideration for RMD recipients is contributing to a Roth IRA, provided they meet the eligibility requirements. For 2025, individuals filing as single can make a full Roth IRA contribution if their modified adjusted gross income (MAGI) is less than $150,000, while married couples filing jointly can contribute fully if their MAGI is below $236,000. The annual contribution limit for 2025 is $7,000, or $8,000 for those aged 50 and older.

For high-income earners exceeding these limits, a “backdoor Roth” strategy allows for contributions to a Roth IRA. This involves making non-deductible contributions to a traditional IRA and then converting those funds to a Roth IRA, as income limitations do not apply to conversions. While this strategy can be effective, it is important to understand that any earnings accrued in the traditional IRA before conversion may be subject to taxation. Beyond these options, RMD funds can also support other long-term investment goals, such as accumulating a down payment for real estate or providing capital for a business venture.

Charitable Contributions with RMDs

Required Minimum Distributions offer unique opportunities for philanthropic giving, particularly through Qualified Charitable Distributions (QCDs). A QCD involves a direct transfer of funds from an IRA to an eligible charity, providing a tax-efficient method of giving. To qualify for a QCD, an individual must be at least 70½ years old at the time of the distribution.

A significant benefit of a QCD is that the distributed amount is excluded from the individual’s taxable income, unlike regular RMDs. This exclusion can help reduce overall taxable income, potentially lowering the individual’s tax bracket or preventing the phaseout of other tax deductions. The maximum amount that can be transferred as a QCD is $108,000 per individual per year for 2025, and this amount counts towards satisfying the annual RMD requirement.

Executing a QCD typically involves the IRA custodian directly transferring the funds to a qualified 501(c)(3) charitable organization. Funds passed through the account holder before reaching the charity generally do not qualify as QCDs.

While QCDs offer distinct tax advantages, individuals can also make charitable contributions after receiving their RMD as a taxable distribution. In such cases, the RMD is first included in taxable income, and then the donation may be deductible if the taxpayer itemizes deductions. For those interested in more structured charitable giving, RMD money that has been taken as a taxable distribution can be contributed to a donor-advised fund, allowing for future distributions to various charities over time.

Gifting and Financial Support

Required Minimum Distributions can also be strategically used to provide financial support to family members or friends. Direct monetary gifts are a common way to share RMD funds, subject to annual gift tax exclusion limits. For 2025, an individual can gift up to $19,000 to any number of recipients without triggering gift tax reporting requirements. Married couples can effectively double this exclusion, allowing them to give up to $38,000 per recipient without tax implications.

If a gift exceeds the annual exclusion amount, the excess typically reduces the giver’s lifetime gift tax exemption, which is $13.99 million per individual for 2025, rather than immediately incurring gift tax. While a gift tax return (Form 709) may be required for amounts exceeding the annual exclusion, most individuals will not owe gift tax due to this substantial lifetime exemption.

Another impactful use of RMD funds is contributing to 529 plans for the educational expenses of grandchildren or other beneficiaries. These plans offer tax-advantaged growth, and withdrawals are tax-free when used for qualified education expenses. Contributing to a 529 plan can help recipients pursue higher education without accumulating significant student loan debt.

RMD money can also assist others with major purchases, such as a down payment on a home or the acquisition of a vehicle. A unique and often overlooked gifting strategy involves directly paying medical expenses for others. Payments made directly to a medical provider for qualified medical care are not considered taxable gifts, regardless of the amount. This exclusion applies even if the recipient is not a relative, providing a powerful way to support someone’s health needs without gift tax implications.