What to Do with Your RMDs (and What to Avoid)

April 24, 2025

Once you reach age 73, the IRS requires you to begin taking Required Minimum Distributions (RMDs) from your tax-deferred retirement accounts.
If you were born in 1960 or later, your RMD start age is 75.

RMDs apply to:

  • Traditional IRAs

  • SEP IRAs and SIMPLE IRAs (after retirement)

  • 401(k)s, 403(b)s, and 457(b)s (unless you’re still working and not a 5%+ owner)

You must withdraw your RMD annually, or face a 25% penalty on any shortfall (reduced to 10% if corrected within two years).

But withdrawing is only the first step.

What you do with your RMD after that can make or break your financial plan.

Smart Things You Can Do with Your RMDs

1. Reinvest in a Taxable Account

You can’t keep the money in your IRA—but you can still invest it.

Example:
John takes a $40,000 RMD. After withholding $10,000 for federal and state taxes, he deposits the remaining $30,000 into a taxable brokerage account, investing in tax-efficient ETFs and municipal bonds.

This keeps his money growing—outside of retirement accounts.

If you’re considering setting up a Roth IRA for a family member with 1099 income, understanding the nuances of contractor income is crucial. 1099 Contractors: Your Guide to Managing Income, Taxes, and Deductions

2. Fund Family Wealth Strategies

You can use RMDs to support your children or grandchildren—without triggering gift tax.

In 2025, you can give up to $18,000 per recipient without using your lifetime exemption.

Examples:

  • Open a Roth IRA for a grandchild who earns income

  • Contribute to a 529 college savings plan

  • Gift cash to help with a home down payment

Example:
Lisa uses $6,000 from her RMD to fund a Roth IRA for her 19-year-old grandson, who worked part-time and earned $8,000. That money now grows tax-free for life.

3. Make a Qualified Charitable Distribution (QCD)

If you’re age 70½ or older, you can donate up to $100,000 annually from your IRA directly to a qualified charity via a QCD.

QCDs:

  • Count toward your RMD

  • Are excluded from taxable income

  • Can lower Medicare premiums and avoid IRMAA surcharges

Note: You can’t double-dip—QCDs don’t also qualify for a charitable deduction.

Example:
Claire donates $20,000 from her IRA to a local nonprofit. It satisfies her RMD and doesn’t increase her AGI or tax bracket.

Before reinvesting your RMDs, ensure you’re familiar with your financial statements to make informed decisions. Accounting Basics for Physicians

4. Offset Other Taxable Income

RMDs are taxed as ordinary income. You can reduce their impact with strategies like:

  • Harvesting capital losses in taxable accounts

  • Using real estate depreciation from rental property

  • Stacking deductions (e.g., charitable lumping through donor-advised funds)

Example:
Ben takes a $50,000 RMD. He offsets $12,000 of the income by selling underperforming investments at a loss and increasing his itemized deductions.

5. Pay Down Debt or Cover Big Expenses

If you don’t need the money for income, use it to strengthen your financial base:

  • Pay off credit cards or personal loans

  • Cover property taxes, home repairs, or insurance premiums

  • Fund healthcare costs not covered by Medicare

Example:
Diane uses $25,000 of her RMD to pay off a credit card balance and cover her long-term care insurance for the year.

6. Make Strategic Purchases or Transfers

Use RMDs to plan for known costs—don’t let them get lost in your checking account.

Examples:

  • Home upgrades that support aging-in-place

  • One-time family vacation or life event

  • Premiums on a life insurance policy in an irrevocable trust

Example:
Sam uses $12,000 of his RMD to upgrade his HVAC and bathroom for accessibility, preventing future out-of-pocket repairs.

Things to Avoid Doing with Your RMDs

1. Skipping or Underpaying Your RMD

Failing to withdraw the full amount leads to a 25% penalty (reduced to 10% if corrected within 2 years under Secure Act 2.0).

Use IRS Publication 590-B or your custodian’s calculator to confirm the correct amount.

2. Rolling an RMD into Another Tax-Deferred Account

RMDs are not eligible for rollover.

Attempting to roll them over results in an excess contribution, triggering tax and potential penalties.

3. Letting RMDs Sit in Low-Yield Accounts

Don’t leave your RMD in a checking account earning 0.01%.

If you don’t need to spend it:

  • Use high-yield savings

  • Buy Treasury bills or CDs

  • Reinvest through a taxable brokerage account

Example:
Susan moves her $18,000 RMD into a 6-month Treasury bill yielding 4.8% instead of leaving it idle.

4. Ignoring Tax Withholding or Estimated Payments

RMDs can bump you into a higher bracket or trigger underpayment penalties if taxes aren’t properly withheld.

Fix it:

  • Withhold taxes when taking the distribution

  • Make estimated quarterly payments to the IRS if needed

5. Missing Roth Conversion Opportunities Before RMD Age

Once RMDs start, you can’t convert the RMD amount to a Roth IRA.

But you can convert other funds.

Example:
Between ages 65–72, Dennis converts $50,000 per year from his IRA to a Roth IRA before RMDs begin. This lowers future RMDs and builds tax-free income.

6. Not Coordinating with a Spouse

If married, plan together.

Bonus: Build Legacy Value with Your RMDs

  • Use RMDs to pay premiums on life insurance in a trust

  • Fund a donor-advised fund to support multi-year charitable giving

  • Create an annual giving plan for family while alive

Example:
Sandra uses $15,000 of her RMDs each year to fund a second-to-die life insurance policy for her children through an irrevocable life insurance trust. The eventual death benefit passes income-tax-free.

Ask Yourself:

  • Can I use my RMDs to support family or causes?

  • Am I minimizing taxes with the right strategy?

  • Do I need professional advice to reduce penalties or plan better?

  • Should I make Roth conversions before RMDs begin?

    Granting a trusted advisor the authority to act on your behalf can streamline your RMD management.
    Maximize Your Wealth: The Impact of Form 2848 in Taxation

RMDs are required.

But your strategy is optional—and that’s where the opportunity is.

Visit contact physiciantaxsolutions.com to schedule a consultation and learn how we can help you take control of your tax strategy today.

This post serves solely for informational purposes and should not be construed as legal, business, or tax advice. Individuals should seek guidance from their attorney, business advisor, or tax advisor regarding the matters discussed herein. physiciantaxsolutions.com assumes no responsibility for actions taken based on the information provided in this post.

 

Posted in Tax tips and tagged , , , , , , , , ,