What Should You Do With Your RMD? 8 Options To Explore

Saving for retirement is a lifelong endeavor. While you may be in the habit of saving and investing, the government may also require you to make a minimum withdrawal annually. Here's a closer look at required minimum distributions (RMDs) and what to do with your funds.

What Is an RMD?

RMD is short for “required minimum distribution." RMDs apply to employer-sponsored retirement accounts and traditional IRAs. According to IRS rules, once you reach age 72 (or 73 if you reach age 72 after December 31, 2022), you must withdraw a specified minimum amount from your account yearly. Accounts subject to RMD rules include:¹

• 401(k) plans
• 403(b) plans
• 457(b) plans
• Traditional IRAs
• SEP IRAs
• SIMPLE IRAs

If you don't take the RMD, you risk incurring a 50% excise tax on the amount not distributed. Starting in 2024, RMDs are not required for Roth accounts, such as Roth IRAs and Roth-designated 401(k) accounts.¹

For inherited retirement accounts, required withdrawals depend on a number of factors and rules may change over time with updates from Congress or the IRS. If you're unsure of your RMD requirements, check with the IRS website or consult with a trusted tax advisor.

How To Withdraw Your RMD

To make sure you don't miss your RMDs, consider setting up automatic withdrawals. Your first RMD is usually due by April 1 of the year after you turn 72 or 73, depending on when you hit that age. After that, RMDs are due by December 31 each year.¹

To determine your required minimum distribution amount, divide your account balance from the end of last year by a number the IRS gives you based on your life expectancy. It might seem tricky at first, but the IRS has worksheets to help you calculate your RMD amount.

Depending on your investments, you may need to sell assets to fulfill your RMD. Plan ahead, as investment sales can take a few days to settle, depending on your brokerage. Once you withdraw, you can use the funds however you'd like.

What To Do With Your RMD

When the RMD lands in your bank account, you have nearly unlimited options for using the cash. Remember to put aside a portion for taxes—in most cases, IRA withdrawals are taxable at your regular income tax rate.³ Here are some of the most popular ways to use RMDs.

1. Use for living expenses

The default option for many households is to put retirement account withdrawals toward living expenses, which is the general reason they saved for retirement in the first place. Depending on your budget, savings and other income, your RMD could be a critical source of funds. After recent inflation at the grocery store, every extra dollar of available income helps. Check out our guide on creating a budget, and consider how your RMD fits into your spending plan.

2. Pay down debt

Using your RMD for big-ticket items—such as paying off a home equity line of credit, a large medical bill or a student loan—may save you money on interest in the long run. An early payment can significantly affect your finances if you have a high-interest credit card or personal loan balance. And eliminating monthly payments can free up cash for living expenses, travel or anything else you value.

3. Save it

If you don't need the funds for necessities, put the money back to work by saving it in a high yield savings account or certificate of deposit (CD). Cash in a Synchrony Bank savings account is FDIC-insured, making it one of the safest places to put your money. Consider using your withdrawal to create an emergency fund or "rainy day" fund if you don't already have one.

4. Reinvest

Investing in stocks or bonds appropriate for your risk tolerance and financial goals can lead to a more significant long-term payoff. Exchange-traded funds (ETFs) and mutual funds offer diversified portfolios and may come with low fees. Consider the tax implications of investing if you're concerned about capital gains and other investment-related taxes.

5. Roll over into a Roth IRA

Roth IRAs have no RMDs during your lifetime. For traditional IRAs, you'll pay taxes on the amount you withdraw because those contributions were made with pretax dollars. Once your money is in a Roth IRA, it grows tax-free—and you can withdraw it tax-free in retirement, as long as you meet certain conditions.

6. Donate

If you have an RMD to take and want to make a charitable contribution, consider using a qualified charitable distribution (QCD). With a QCD, you can transfer up to $100,000 each year directly from your IRA to an eligible charity, which can help lower your taxable income. This option is only available for IRA withdrawals, not 401(k) plans.⁴

7. Pass it on

You can use your RMD to help fund a family member's education by contributing it to a 529 college savings plan. In a 529 account, the money grows tax-free, and withdrawals are tax-free if used for qualified education expenses. You'll still need to pay income taxes on the RMD before you contribute it to the 529 plan, but you'll be supporting a cause you care about.

8. Treat yourself

If your essential expenses are met and you're living debt-free, you've earned the ability to use your RMD for fun. Plan a vacation, buy something you've always wanted or treat yourself to anything else. Now that you have a well-thought-out financial plan, you can finally spend on your most valuable asset—you.

Make the Most of Your RMD

Calculating your RMD, withdrawing and paying any required taxes may feel like a chore. But once you've taken your RMD, you can use your funds to better your financial situation or upgrade your lifestyle. As long as you live within your means and stick to your retirement budget, you can save, invest or enjoy the proceeds from your RMD.

Learn More: Rethinking the Rainy Day Fund