Most people assume that when it’s time to retire, they’ll be desperate for every dollar they can scrounge up. It’s a pleasant surprise when someone finds themselves at the point when they have to take Required Minimum Distributions (RMDs) – age 73 in 2025 – but they don’t actually need the money to support themselves. In this blog we’ll give you seven things you may want to consider doing when RMDs are not needed.
Before we get started, you may want to check out these financial planning blogs we’ve written:
Filing your tax return: traps to avoid
Do I have to pay taxes on an inherited annuity?
Questions on IRA distributions
We also wanted to mention that we are financial advisors, but not tax or legal advisors. This blog is a high level view of actions you could take, but nothing we discuss here should be interpreted as advice that applies directly to you. For such advice, it’s best to speak with a financial advisor – someone like us – or a CPA.
And now having said all that, let’s get into it!
RMD’s and your retirement
Beginning at age 73, you must take distributions from your retirement accounts (IRAs, 401ks, etc.) as per the IRS requirements. There were several RMD rule changes for 2025. You may want to check them out if this is unfamiliar to you.
For many, without getting RMDs they wouldn’t have enough money to live off of during retirement. However, it is not uncommon – and we have seen this in several instances in our own practice – for people to have saved, invested, and planned wisely so that they actually don’t need the RMD.
It’s a good problem to have…
Yet it can be a source of confusion for many. What can you do with the RMD you had to take, but don’t need? Here are seven ideas.
#1 Reinvest in a taxable account
If you are thirsting to get back into the market, nothing wrong with investing the money through a taxable brokerage account. The money won’t grow tax-deferred, like it did before, but you are at least able to gain some market exposure.
You may be able to go for an in-kind transfer for the assets you are transferring as the RMD. This would allow you to move your assets from the retirement account to the taxable account without having to sell the position. The benefit is that you can keep your investment allocation unchanged. You’ll still have to pay income tax on the transferred amount, but at least you won’t disrupt the investment strategy you have in place.
#2 Build up your emergency fund
Yes, we know, it’s not exciting…
(sigh)
But you should have 6-9 months of living expenses saved in what’s called an emergency fund, in case something happens to your income. The emergency fund is even more critical during retirement, when you might not be working at all.
Do a quick check of your projected living expenses.
- Are you sure that you’d be covered if your income stream were to stop cold turkey today? How long would it go for?
- Are there contingencies you didn’t consider before?
- Is there anyone in your life that you may need to support, in any likelihood at all, in the future?
If so, you may want to think about putting some of your RMD into building up more cash reserves as a buffer for life events that may or may not be planned for on the horizon.
#3 Support a loved one
If you have grandchildren or any special child in your life, it can be wonderful to send the money to their 529 plan. If they don’t have one, maybe you can establish one with the child as the beneficiary. An unwanted RMD may also be used to support a loved one who is in need.
#4 Donate to charity
You can send the money directly to a charity through a Qualified Charitable Contribution, or QCD, from your IRA account. This bypasses the ordinary income tax you would have paid on it if you were to have taken it as an RMD. There are certain conditions that apply; check with your CPA or tax advisor before taking any action.
#5 Get ahead on taxes
Taxes are a headache for most people. As we mentioned before, it’s best to talk with your CPA for tax strategies specific to your situation.
General guidance would be to have the tax withheld when you take your RMD, if possible. This can help you get ahead on the payment of taxes on the RMD amount. You can also use the RMD to send in more estimated tax payments to the IRS and state prior to filing your annual tax return. Tax guidance from a CPA would be critical in either scenario.
#6 Put the RMD back into a workplace retirement account
If you are still working, there are a few ways you can use the proceeds from an RMD that you don’t need. You could increase 401k contributions from your paycheck, while using the RMD proceeds to fund your living expenses.
If you are self-employed, you may want to explore higher-deduction retirement plans such as defined benefit plans. If the RMD is able to cover the costs that your salary would, it may be a good idea to put more of your earned income into retirement accounts offered through your business.
#7 Enjoy it
Take a trip, do that home renovation you’ve always wanted, buy yourself a new car. The years of prudence and self-denial have paid off and now you can enjoy the fruits of your labor!
(Just don’t overdo it).
Note: Putting into a Roth IRA is NOT an option!
We commonly get the question, “If I have to take RMDs before I need the money, can’t I just put it back into a Roth IRA?
The answer is: No!
You can’t convert an RMD to a Roth contribution. You can only fund IRA accounts with earned income. An RMD is not earned income, and therefore does not qualify as a permissible contribution source.
We help super savers retire – want to talk?
Congratulations on being such a super saver that you don’t even need the RMD’s you have to take. What’s your overall financial plan, though?
We are financial advisors in Morristown, NJ serving the local community and beyond. If you have questions about your RMDs, retirement strategy, retiring in New Jersey, affording to live there, or (like us) are just plain old Bruce Springsteen fans, reach out and send us a message.
Sources
IRS. 2023, November 16th. Qualified charitable distributions allow eligible IRA owners up to $100,000 in tax-free gifts to charity. https://www.irs.gov/newsroom/qualified-charitable-distributions-allow-eligible-ira-owners-up-to-100000-in-tax-free-gifts-to-charity