Most people only need one option for the money the government requires those 73 or older to withdraw each year as required minimum distributions (RMDs) from qualified retirement accounts: Spend it.
Given that the average retirement balance of those aged 65 and over is $235,000, according to Vanguard’s How America Saves 2023 report, there’s not that much cash involved. So most people just spend the RMD, which is based on a formula that takes into account your age and account balance. It ends up serving as replacement income during the next year, along with their Social Security and whatever other income they have from pensions and investments.
But there are those who have a significant amount saved in IRA and 401(k) plans from their working years, and already have their daily expenses covered. For them, RMDs are a government-induced tax burden, because the required withdrawals count as taxable income and can push people into higher tax rates on their Social Security benefits, and add IRMAA surcharges to their Medicare premiums.
That’s where tax-savvy strategies come into play for reinvesting RMD withdrawals, which you can take out in lump sums or regularly throughout the year. Financial advisers say most of their clients tend to opt for end-of-year withdrawals — typically in late November or early December to make sure it gets done in time to avoid penalties. This way, you can get tax-deferred growth up until the last minute and assess the market dynamics for a longer period to figure out the right time to sell.
And what should you be selling this year? “We sell those assets which are up the most at that time and, in this case, it’s mainly large-cap growth investments rather than value or bonds,” says Daniel Lash, a certified financial planner based in Vienna, Va.
Here’s what financial advisers say you can do with your RMD this year:
1. Give gifts to family
The 2023 gift tax limit is $17,000 per giver to each recipient, so if you’ve got extra cash, you can start writing checks. “This allows you to share your financial success with loved ones,” says Julie Anderson Bray, a financial adviser in Reno, Nev. If you’re worried about the estate-tax exemption being cut in half in 2026, this is also a great way to reduce your assets ahead of time.
2. Make a QCD
The IRS allows you to give up to $100,000 as a qualified charitable distribution (QCD) that counts toward your RMD for the year. For David Demming, a financial adviser from Aurora, Ohio, these are the top priority for high-net-worth clients. “All QCD’s get done first,” he says. Then they calculate what’s left of the RMD, and make their choices for what to do next. Their motto: If you don’t spend it then we will reinvest it!”
3. Fund a 529 plan
Another way to be tax-savvy with your RMD and gift is to put some of the funds into 529 college accounts, where the money can grow tax-free if it’s used for educational purposes; part of it can now be rolled over into a Roth IRA for the beneficiary if unused. Some states offer a state-tax deduction for annual contributions. “You can also front-load the plan and contribute up to $85,000 for 2023 and have it treated as five years of future contributions,” says adviser Erika Safran, who is based in New York. “Let your accountant know so they can file the appropriate additional forms.”
4. Prepay taxes
One option that most people don’t often consider is to use the RMD as a way to cover your whole tax burden for the year. “Essentially you pay a portion of your taxes from your IRA,” says Safran.
Steven Martin, an adviser from Plainfield, Ill., had a client withhold 100% of his RMD for this purpose. “It’s an interesting, and often overlooked, way to use RMDs,” he says.
5. Rebalance your portfolio
There are several strategies to just redeploy your RMD if you’re not going to spend it right away (or ever). Reinvesting it in a brokerage account in exactly the same way it was invested in your qualified account is one easy choice. You can also put it into a brokerage account and follow the path you’re on with that account. One tax advantage if you are going to pass most of these funds onto heirs: “Your investments will also receive a step-up in cost basis when you pass, helping your beneficiaries,” says Brian Schmehil, an adviser from Chicago.
6. Build a short-term Treasury ladder
If you’re not quite sure what you might need the money for, consider a short-term Treasury or CD ladder – whichever has the highest rate when you set up the purchase. “Directly purchasing Treasury bills from TreasuryDirect.gov makes a lot of sense,” says George Gagliardi, an adviser from Lexington, Mass. “T-bills of durations of 1, 2, 3, 4, 6 and 12 months can be purchased in increments of $100. All of these are currently yielding over 5.2%.”
7. Bank it
If you’re not sure yet what you want to do with the money, at least have it work for you while you think about it. The national average checking account interest rate is still under 1%, according to Depositaccounts.com. Don’t put it there! “A high-yield money-market account is a good option for maintaining liquidity and stability,” says Jonathan Swanburg, an adviser from Houston, Texas. You should be able to earn close to 5%, if not more, depending on the institution.
8. Do a Roth conversion
If you’re not spending your annual RMD, that’s a sign that a Roth conversion might be in your benefit, but you have to proceed carefully, because there are a lot of caveats, especially concerning pushing your income into higher tax brackets, increasing the taxation of your Social Security and bringing on IRMAA surcharges on your Medicare premium. But, if you thread the needle, converting some of your qualified retirement income into a Roth could reduce your RMDs in the future and make it easier for your heirs. “If your RMD is $50,000, you could convert an additional $125,000 of your traditional IRA to a Roth IRA, utilizing the entire RMD to cover associated taxes,” says Anderson Bray.
9. Take a risk
If your RMD money is truly “extra,” and you have a high risk tolerance and a lot of investing knowledge, you may want to try some advanced strategies with the help of a financial adviser. Ashton Lawrence, an adviser from Greenville, S.C., had clients implement options strategies with their RMDs. “What makes this strategy compelling now is that you can receive [about] 5% for that cash position and then you’ll also receive the option premiums from the option contracts while waiting for a lower entry point; and should the market grind higher, you continue to collect the premiums along the way,” he says.
Sometimes, retirees who have been saving their whole lives need a little extra nudge to spend. “Take a vacation and enjoy your well-earned money,” says Safran.