What Should You Do with an RMD You Don't Need?

Required minimum distributions can create an odd problem in retirement.

You spent decades saving into an IRA or 401(k). Eventually, the IRS requires you to start taking some of that money back out—even if your Social Security, pension, taxable investments, or other income already cover everything you need.

So what should you do with an RMD you don’t need?

The first thing to understand is that an RMD is a forced distribution. It is not a forced spending decision.

Once the money leaves your retirement account, you still get to decide what you want that money to accomplish.

You might reinvest it. You might use it to cover taxes. You might give some of it to charity, help your family, rebalance your investments, or simply add it to your cash reserves.

And if you have not reached RMD age yet, the fact that you expect to have “unneeded” RMDs later may be a reason to start planning now.

Before we get into those decisions, a quick introduction.

I’m Dwight Dettloff, CFP®, CPA/PFS, RICP®, and the founder of Winding Trail Financial Planning, a fee-only fiduciary financial planning firm in Lafayette, Colorado. I work primarily with retirees and people within a few years of retirement who want to better coordinate their investments, taxes, retirement income, Social Security, Medicare, and long-term financial decisions.

If you are approaching retirement or already taking RMDs and want help coordinating these decisions instead of treating each one separately, you can Start Here.

First, What Is a Required Minimum Distribution?

A required minimum distribution, or RMD, is the minimum amount the tax rules generally require you to withdraw each year from certain tax-deferred retirement accounts.

For many current retirees, RMDs begin at age 73. Under current law, the starting age increases to 75 for people born in 1960 or later. Traditional IRAs and many workplace retirement accounts are subject to RMD rules, while original owners of Roth IRAs generally are not.

The underlying idea is fairly straightforward.

You may have received a tax deduction when you contributed money to a traditional retirement account, and the investments were generally allowed to grow tax-deferred. Eventually, the government wants to collect income tax on that money.

An RMD therefore usually creates taxable income whether or not you actually need the cash for living expenses.

That distinction matters.

If you need your RMD to pay the mortgage, buy groceries, travel, or fund your normal retirement spending, there may not be much of a decision to make.

But if your RMD shows up in your checking account and simply piles up, that is a signal to ask a better question:

What is this money for now?

You Can Reinvest an RMD You Don’t Need

One of the simplest options is to move the after-tax proceeds into a taxable brokerage account and reinvest them.

You cannot generally put your RMD back into the IRA simply because you did not need it. But once you have satisfied the distribution requirement and paid any applicable tax, the remaining money is yours to invest.

This can make sense if the money is still intended for long-term goals.

For example, perhaps you are 75, your pension and Social Security cover most of your spending, and you expect your portfolio to ultimately support a surviving spouse, future health care costs, or your children and grandchildren.

There is no rule saying an RMD needs to be spent.

But do not automatically recreate the same portfolio in the taxable account without considering taxes.

Investments that work well inside an IRA are not always the investments you would choose for a taxable brokerage account. Interest, dividends, capital gains, and investment turnover can all affect the tax bill.

This is where asset location can become part of the RMD conversation.

A taxable account may favor different investments than a traditional IRA or Roth IRA. And as your IRA shrinks while your taxable account grows, it may make sense to look at your investment allocation across all of your accounts rather than managing each account separately.

If you are a Colorado retiree, this also intersects with state taxes. I cover that in more detail in What Taxes Will Retirees Pay in Colorado?.

Your RMD Can Also Be a Tax-Payment Tool

Sometimes the best use of an RMD is not an investment at all.

It is paying the tax bill.

Retirement often creates a more complicated tax-payment system than your working years. When you were employed, taxes may have simply disappeared from every paycheck. In retirement, income can arrive from Social Security, pensions, IRAs, investment accounts, rental properties, business income, and other sources.

Some of those sources may have little or no tax withheld automatically.

Federal income tax can generally be withheld from retirement distributions, including IRA distributions, and adequate withholding may reduce or eliminate the need for separate estimated tax payments.

For someone who already has to take an RMD, that creates a useful planning opportunity.

Instead of taking the entire distribution in cash and then separately writing quarterly estimated-tax checks, you may be able to have some of the RMD withheld for federal or state income taxes.

The correct withholding amount depends on your entire tax situation—not merely the tax attributable to the RMD itself.

That may include:

• Social Security and pension income

• Capital gains

• Interest and dividends

• Roth conversions

• Business or rental income

• Charitable deductions

• Other retirement-account withdrawals

I generally prefer to deal with RMDs relatively early in the year rather than waiting until December. Part of that is simply risk management: once the RMD is completed, it is one less year-end deadline to remember, and missing an RMD can create an avoidable tax penalty.

There can also be an investment rationale. Markets have historically had a positive long-term return, so if you already know the RMD needs to leave the IRA and you plan to reinvest the after-tax proceeds, taking it earlier can get that money back to work sooner. Of course, markets do not rise every year, so I would not try to turn RMD timing into a market-timing strategy.

The wrinkle is tax withholding. Early in the year, you may not yet know exactly what taxable income will look like. Capital gains, Roth conversions, portfolio distributions, business income, or other variables can change the tax picture as the year progresses. So while I often like getting the RMD itself handled in the first quarter, I may leave some flexibility around withholding or other tax payments until the annual tax picture becomes clearer.

This is one reason I prefer to think of RMD planning as part of the annual tax plan rather than as an isolated December transaction.

If You Give to Charity, Look at a Qualified Charitable Distribution First

For charitably inclined retirees, one of the most valuable RMD strategies may be a Qualified Charitable Distribution, commonly called a QCD.

A QCD allows an eligible IRA owner to direct money from the IRA directly to an eligible charity. You must generally be at least age 70½ when the distribution is made. A qualifying QCD can be excluded from taxable income and can also count toward your RMD.

QCDs are subject to an annual limit that is adjusted for inflation.

That can be materially different from this approach:

1. Take a taxable $10,000 RMD.

2. Deposit it into your checking account.

3. Write a $10,000 check to charity.

4. Hope the charitable deduction offsets the additional income.

Depending on your tax situation, it may not.

A QCD instead keeps the qualifying distribution out of income in the first place.

That can be particularly valuable for retirees who use the standard deduction and therefore may receive little or no incremental federal tax benefit from a traditional charitable deduction.

It can also matter because adjusted gross income influences several other parts of a retiree's tax picture, such as IRMAA.

The key procedural detail is important: the money generally needs to go directly from the IRA to the qualifying charity. Taking the RMD yourself first and later donating the cash does not turn the original withdrawal into a QCD.

Also, it's important to note that QCDs cannot be directed to donor-advised funds (DAF), although current law does allow a one-time election to use a limited amount of QCD dollars to fund certain charitable remainder trusts or a charitable gift annuity.

If charitable giving is already part of your retirement, I would at least compare the QCD approach with simply taking your RMD and writing a personal check.

An Unneeded RMD Can Fund Family Goals

Perhaps charity is not your priority, but helping children or grandchildren is.

An RMD can provide the cash for that too.

You could use some of the distribution to help fund:

• A grandchild's 529 plan

• A family vacation

• Education expenses

• A child's or grandchild's first home

• Other intentional lifetime gifts

The word intentional matters.

I generally would not suggest taking money that you need for your own retirement simply because you feel obligated to give it away.

But an RMD that you genuinely do not need may prompt a worthwhile conversation about whether some of your wealth could have more impact during your lifetime.

There is a difference between leaving a larger inheritance someday and taking your adult children and grandchildren on a family trip next summer.

Neither is automatically better.

They simply accomplish different things.

If helping grandchildren is a priority, the account or strategy you choose should follow the goal. A 529 plan, taxable account, direct gift, or another savings vehicle may each solve a different problem. The same applies to newer options such as Trump Accounts, which I discuss in What Are Trump Accounts? A Guide for Grandparents and Families.

The bigger planning issue is deciding what you want the money to do before deciding where it should go.

Use RMDs as Part of Your Portfolio Rebalancing

RMDs can also create an opportunity to rebalance your portfolio.

Suppose your target portfolio is 60% stocks and 40% bonds, but a strong stock market has pushed the allocation to 68% stocks and 32% bonds.

If you need to take an RMD anyway, you may be able to sell investments from the overweight portion of the IRA to help bring the portfolio closer to target.

Alternatively, if you are reinvesting the RMD into a taxable account, you may purchase whichever asset class is underweight there.

The important point is that the RMD itself becomes part of the portfolio-management process.

Rather than:

Calculate RMD → Sell something → Send cash

the process becomes:

Calculate RMD → Review tax situation → Review portfolio → Decide what to sell → Decide what the proceeds should accomplish

That is a small change in sequence, but it can produce a much more coordinated result.

It is similar to the broader retirement-planning decisions I discuss in What Should You Do 5 Years Before Retirement?. Investments, taxes, spending, and retirement-income decisions tend to work better when they are considered together.

Watch the Medicare IRMAA Impact

There is another wrinkle for Medicare beneficiaries.

Taxable RMDs increase adjusted gross income, which can potentially contribute to higher Medicare Part B and Part D premiums through the Income-Related Monthly Adjustment Amount, or IRMAA.

Medicare generally uses income from two years earlier when initially determining IRMAA. That means a large IRA distribution this year can potentially affect Medicare premiums two years from now.

You cannot simply refuse an RMD because it might affect Medicare premiums.

But you can look for ways to manage the rest of your income intelligently.

A QCD, for example, may satisfy part of an RMD without adding the qualifying distribution to income. Roth withdrawals may provide another source of spending money without increasing taxable income when the withdrawal is qualified.

And before RMD age, proactive tax planning may help reduce the size of the traditional IRA that will eventually be subject to required distributions.

I go deeper into this interaction in What Colorado Retirees Should Know About Medicare IRMAA and Tax Planning.

The Bigger Question May Be Why You Have an RMD You Don’t Need

There is nothing inherently wrong with having an RMD that exceeds your spending needs.

It may simply mean you saved very well.

But large unneeded RMDs can also reveal a tax-planning opportunity that may have existed years earlier.

Imagine someone retires at 65.

Their salary disappears. They have not yet started Social Security. RMDs have not begun. They have substantial money in a traditional IRA.

Those years may create a lower-income planning window.

That can be a particularly useful time to evaluate Roth conversions.

A Roth conversion moves money from a traditional tax-deferred retirement account into a Roth account and generally creates taxable income in the year of conversion. In exchange, future qualified Roth distributions can be tax-free, and Roth IRAs owned by the original account holder are not generally subject to lifetime RMDs.

The goal is not simply to “avoid RMDs.”

The better question is whether paying some tax earlier could reduce lifetime taxes, create more flexibility later, improve planning for a surviving spouse, or leave heirs a more tax-efficient mix of assets.

I discuss the mechanics and tradeoffs in Are Roth Conversions Worth It?.

Roth conversions are not automatically a good idea. Converting too much can increase your current tax rate, affect Medicare IRMAA, trigger other tax consequences, or simply cause you to prepay tax at an unnecessarily high rate.

But if you reach your 70s and repeatedly find yourself asking what to do with an RMD you never wanted, it is worth asking whether the traditional IRA should have been managed differently during the decade before RMDs began.

That is why retirement tax planning often works best before the tax problem becomes obvious.

An RMD Should Fit Into the Rest of Your Retirement Plan

Required minimum distributions are sometimes treated as an administrative task.

The custodian calculates the amount. The money gets distributed. Taxes are withheld. Done for another year.

Technically, that may satisfy the requirement.

But it misses the planning opportunity.

An RMD affects your taxes, investments, cash flow, charitable giving, Medicare premiums, estate plan, and potentially the wealth you eventually transfer to your family.

The better question is not merely:

“How much do I have to take out?”

It is:

“Now that this money has to come out, what do I want it to accomplish?”

That answer may be completely different from one retiree to the next.

And that is exactly why RMD planning should be connected to the rest of the retirement plan.

Thanks for reading!

Dwight Dettloff, CFP®, CPA/PFS, RICP®

At Winding Trail Financial Planning, I help retirees and people within a few years of retirement coordinate retirement income, investment management, tax planning, Roth conversions, Social Security, Medicare, charitable giving, and family goals.

We are a fee-only fiduciary financial planning firm based in Lafayette, Colorado, serving clients in Lafayette, Louisville, Erie, Boulder, Broomfield, and beyond.

If your RMDs, Roth conversions, charitable giving, or retirement withdrawals are being handled as separate decisions, it may be worth looking at how they fit together.

Learn more about retirement planning in Lafayette, Colorado, or Start Here if you would like to talk.

Common Questions About RMDs You Don’t Need

What should I do with an RMD if I don’t need the money?

If you do not need your required minimum distribution for living expenses, you can reinvest the after-tax proceeds in a taxable brokerage account, use the distribution for tax withholding, give money to family, fund other financial goals, or potentially use a Qualified Charitable Distribution if you are eligible and charitably inclined. The best choice depends on your tax situation, investment plan, charitable goals, and estate plan.

Can I reinvest my RMD into another investment account?

Yes. Once you take the required distribution and account for any applicable taxes, you can generally invest the remaining proceeds in a taxable brokerage account. You generally cannot put the RMD back into the IRA from which it was required simply because you did not need the money.

Can I put an RMD into a Roth IRA?

An RMD itself cannot be converted to a Roth IRA. If you are subject to an RMD for the year, the required distribution generally must be taken before additional eligible IRA dollars are converted to Roth. Whether a Roth conversion makes sense after satisfying the RMD depends on your income and tax situation.

Can a Qualified Charitable Distribution satisfy my RMD?

Yes. A qualifying QCD can count toward all or part of your required minimum distribution. To qualify, you generally must be at least age 70½ when the distribution is made, and the money must generally go directly from the IRA to an eligible charitable organization.

Is a QCD better than taking an RMD and donating the money?

It can be. A qualifying QCD is generally excluded from taxable income, while taking a taxable RMD and later making a charitable contribution first increases your income and then relies on the charitable-deduction rules for a potential tax benefit. The better approach depends on your tax situation, but retirees who already plan to give to charity should usually evaluate whether a QCD is available.

Do RMDs affect Medicare premiums?

They can. Taxable RMDs increase income and may contribute to higher Medicare Part B and Part D premiums through IRMAA. Medicare generally bases IRMAA on income reported two years earlier, so retirement withdrawals should be coordinated with other taxable income when possible.

Can I avoid RMDs by doing Roth conversions?

Roth conversions do not eliminate an RMD that is already due for the year, and the RMD itself cannot be converted. However, Roth conversions completed in earlier years can reduce the amount remaining in traditional retirement accounts and potentially reduce future RMDs. Whether that actually improves your lifetime tax result requires more analysis than simply trying to minimize RMDs.

At what age do required minimum distributions start?

Under current federal law, RMDs generally begin at age 73 for many current retirees. The applicable RMD age increases to 75 for people born in 1960 or later. The exact rules depend on your birth year, the type of retirement account, and in some cases whether you are still working.