I Don’t Need My RMD Money – What Are My Options?

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Anyone with a 401(k), traditional IRA or similar tax-deferred retirement account eventually is going to face the requirement to start taking required minimum distributions (RMDs) from their accounts. The IRS has allowed you to have what can be decades of tax-free growth in the account, along with years of tax deductions, so they eventually requiring you to start paying those taxes, regardless of whether you need the funds or not.

Starting at age 73 in 2024 (RMD age moving to 75 in 2033), the law says you must take a certain amount of money out annually, and it’s based on how the IRS sees your life expectancy. If you fail to take your RMD, the penalty is a whopping 25% of the amount you didn’t withdraw (can be lowered to 10% if rectified within two years).

Do you have questions about planning for RMDs? Speak with a financial advisor today.

For someone who doesn’t need the cash from an RMD to cover living expenses, the issue becomes not only what to do with the money, but also how to minimize taxes. This is important because RMDs can induce a number of different tax increases across your life.

For instance, you’ll first face paying taxes on the withdrawal as ordinary income. Then, depending on the amount of your RMD, you could have enough total income to trigger taxes on up to 85% of your Social Security benefits. A higher income also could increase your Medicare premiums, which are subject to an income-related monthly adjustment amount (IRMAA) surcharge.

There are a few strategies you can use to minimize or avoid taxes on your RMDs, including the following:

The simplest approach is to donate some or all of the money to a qualified charity as a Qualified Charitable Distribution, or QCD. In this case, you never touch the money because it goes directly to the charity, meaning you won’t face any tax on the donation. This works only if the money is sent directly to the charity – you can’t withdraw it and then donate it yourself – and you also need to make sure the charity meets IRS rules in order to be considered qualified. The IRS limits QCDs to $105,000 for 2024.

If you’re still working and have a 401(k) at your current employer, you aren’t required to take an RMD from that account, and that account only. This could be a good reason to roll over money from previous 401(k)s into your new employer’s plan, rather than into an IRA. Otherwise, you’re required to take a taxable RMD from each one of those older 401(k)s.

You can use up to $200,000 of distributions from IRAs or 401(k)s to purchase a Qualified Longevity Annuity Contract (QLAC). If you do this, whatever cash you use for the purchase gets subtracted from your taxable income for the year. The catch is that the IRS requires you to start taking taxable payments from the annuity when you turn 85, so this does eliminate your taxes, but only for 12 years if you start RMDs at 73.

Do you have questions about planning for RMDs? Speak with a financial advisor today.

You can potentially offset the tax hit from an RMD by reinvesting the money in a Roth IRA, provided you have enough earned income (doesn’t have to come from a paycheck) to cover that contribution amount. So, if you want to contribute, say, $6,000 out of your RMD after you withdraw it and pay taxes on it, you need at least $6,000 of earned income on paper to cover it.

Then, you can reinvest that money into a Roth IRA and avoid taxes on the gains that money earns, as a Roth IRA is a post-tax account. However, the account must be active for five years after the tax year you first contribute to it before withdrawals are actually tax-free.

Finally, you can invest the cash in a taxable investment account and hold those assets for more than a year so that any profits will qualify as long-term capital gains. These feature lower tax rates of 0% up to 20%, depending on your tax bracket.

Consider consulting a financial advisor to build an appropriate investment strategy.

You could also consider using the money to hire an estate planner or lawyer to craft a plan and strategy that minimizes taxes for you and your heirs, if you’ll be leaving money behind. Just like investing an RMD, you’ll pay taxes now on the money, but you can use it for an estate plan that indirectly reduces taxes down the road.

If your spouse is younger than you and hasn’t reached the age to take RMDs, don’t include those accounts in your RMD calculation. The “I” in IRA stands for “individual,” meaning there’s no joint RMD considerations until you’re both old enough to take RMDs.

If your spouse is more than 10 years younger, you can name them as the sole beneficiary of your retirement account, which allows you to calculate your RMDs using your spouse’s longer life expectancy, as outlined in the IRS Joint Life and Last Survivor Expectancy Table.

A financial advisor can help you build a robust plan for your retirement. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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