6 Options for Your RMD

Required Minimum Distributions (RMDs) are mandatory withdrawals you must take from certain retirement accounts once you reach a specified age (currently 73, or 72 for those born between 1951 and 1959). Here are the 6 most common options we see for handling RMDs:

1. Spend it

• What It Means: Use the RMD to cover current expenses, travel, or hobbies.‍
• Benefits: Provides liquidity for living expenses or large purchases.‍
• Tax Impact: The withdrawn amount is subject to income tax, increasing your taxable income for the year.

2. Reinvest the RMD in a Non-Retirement Investment Account

• What It Means: Take the cash from your RMD and invest it in a taxable non-retirement account.
• Benefits: Keeps the funds growing while maintaining some flexibility.
• Tax Impact: Earnings on investments in the taxable account will be subject to capital gains tax.

3. Use a Qualified Charitable Distribution (QCD)

• What It Means: Donate your RMD directly to a qualified charity.
• Benefits: Avoids including the RMD amount in taxable income while fulfilling charitable goals.
• Tax Impact: The distributed amount (up to $100,000 per year) is excluded from your taxable income.

4. Contribute to a Grandchild’s 529 College Savings Plan

• What It Means: Use the RMD funds to contribute to a 529 plan for your grandchild’s education.
• Benefits: Funds grow tax-free if used for qualified education expenses. Helps your grandchild avoid student loan debt. Some states offer state income tax deductions or credits for contributions. This is a great way to create a legacy by supporting your grandchildren’s education while meeting your RMD obligations.‍
• Tax Impact: The RMD amount is still subject to federal income tax when withdrawn, but future earnings in the 529 account are tax-free if used for qualified educational purposes.

5. Pay Down Debt

• What It Means: Use the RMD to reduce or eliminate outstanding loans, like a mortgage, car loan, or credit card debt.
• Benefits: Reduces financial obligations and interest payments.
• Tax Impact: Subject to regular income tax on the RMD amount.

6. Combine Options

• What It Means: Split your RMD among several uses, such as spending some, donating to charity, and reinvesting the rest.
• Benefits: Flexibility to meet multiple goals.
• Tax Impact: Based on how you allocate the funds.

Key Points to Remember

• If you fail to take your RMD by the deadline (usually December 31, or April 1 of the year after your first RMD is due), you'll face a steep penalty—currently 25% of the amount not withdrawn (reduced to 10% if corrected promptly).
• Always consult with a financial advisor or tax professional to determine the best strategy for your situation.