5 smart ways to use RMDs—even if you don't need them

After focusing on saving for decades, shifting your retirement money mindset to withdrawing and spending those funds could take some effort. But once you've retired, that might be exactly what you must learn to do—regardless of whether you need the money immediately.

If you have certain retirement accounts, such as traditional individual retirement accounts (IRAs) or 401(k)s, you must take RMDs, or required minimum distributions, from those accounts once you reach a certain age.

Here's an overview of how they work, along with five ways to use RMDs.

Certain retirement accounts offer tax deferral, where the IRS doesn't collect taxes on your contributions or their earnings until you withdraw the money. But to ensure retirees eventually take the money out and pay the taxes owed on it, the IRS has designated an age at which you have to start withdrawing a minimum amount of money every year.

You must take RMDs if you're the original owner of certain tax-deferred retirement accounts, including:

• Traditional IRAs
• 401(k)s
• 403(b)s
• 457(b)s
• SIMPLE IRAs
• SEP IRAs
• Defined contribution plans
• Profit-sharing plans

Roth IRAs and other Roth accounts do not have RMDs.

The age at which you have to begin taking RMDs every year depends on your birthdate:

• Born 1951-1959: You must take RMDs starting at age 73.
• Born 1960 or later: You must take RMDs starting at age 75.

If you're employed when you reach your RMD age (and you don't own 5% of the company you work for), you can wait until you retire to take RMDs from that job's 401(k)—provided the plan allows it.¹

RMDs are taxed as ordinary income, and you must keep taking them every year until you deplete your account. Any RMD amount you don't take in the year may be subject to a 25% excise tax, though that may drop to 10% if you take the missed RMD within two years.

Your RMDs are determined each year by dividing the account's prior year-end value by a life-expectancy factor set by the IRS.

The easiest way to calculate your RMD is to ask the administrator of your account, but you also can calculate it yourself using the IRS's RMD worksheet. You'll need:

• Your age
• Your account balance as of December 31 of the previous year
• The Uniform Lifetime Table (or other table for your situation)

Using your information and the table, look for the life expectancy factor associated with your age. For example, per the most recent table, a 75-year-old has a life expectancy factor of 24.6.

To determine the RMD, divide your account balance by the life expectancy factor. Using the same example, if a 75-year-old had $200,000 in a traditional IRA at the end of the previous year, that balance divided by 24.6 would put that person's RMD at $8,130.08.

The calculation is used for every qualifying account you own. Marital status only affects your RMD calculation if one spouse is at least 10 years younger than the other. In this case, use the IRS joint life expectancy table to calculate your RMDs.

An RMD is the minimum amount you have to withdraw from a retirement account each year. Many retirees plan to use RMDs to cover their everyday cost of living. But you may have to take out more than you actually need for your essentials, and you can choose how to spend, save or donate it.

Here are five ways to use RMDs in retirement, whether you need the money for day-to-day expenses or not.

Supporting yourself in retirement with the funds you worked so hard to save is a common option for RMDs. It can be a tax-efficient strategy to plan on this kind of retirement income when you think you'll be in a lower tax bracket during retirement than you were in your working years. (Remember: RMDs are taxed as ordinary income.)

As you prepare for retirement and think about how to use your RMD to support your day-to-day life, it helps to have a retirement budget. It can help you identify goals, set spending priorities, establish savings targets and determine where you'll direct your resources—including RMDs.

As part of your retirement budgeting process, ask yourself questions, such as:

When do you expect to retire?
Do you expect to work part-time after that?
Do you have a pension that will partially fund your retirement?
How much Social Security might you receive?

A retirement income calculator can help you gauge whether your savings are on track to meet your financial goals.

If you don't allocate RMDs toward living expenses, you may want to add them to your emergency savings account. Unplanned expenses and medical costs are common during retirement, and an emergency fund can keep your budget from getting derailed.

In addition to the savings accounts and CDs people often consider for keeping their back-up money, you might consider reinvesting some or all of your RMDs. These two products can help you balance the ability to quickly access your money (liquidity) with the opportunity for ongoing growth:

Mutual funds. With mutual funds, you invest in a managed, diversified pool of stocks and/or bonds. You can choose funds based on your growth goals, your risk tolerance and how soon you expect to need the money. Mutual funds are relatively easy to sell when needed, and some even produce income via periodic dividend distributions. You also may be able to name beneficiaries to receive the fund in the event of your death.

Annuities. Annuities can help convert your RMDs into an ongoing income stream guaranteed to last through the rest of your life. You can use RMDs to buy nonqualified (after-tax) annuities. You'll pay income taxes on the RMDs in the years you take them, but after you've used RMD money to purchase the annuity, the earnings again can grow tax-deferred until you withdraw them. Many annuities offer opportunities to provide death benefits or recurring income distributions to beneficiaries.

Another consideration is delaying RMDs by transferring a portion of your retirement assets into a qualified longevity annuity contract (QLAC). In 2025, you can invest up to $210,000 in a QLAC, removing those funds from your current RMD calculation. The QLAC can later provide an ongoing, lifetime income stream. You must start taking distributions by the time you reach age 85.

As college costs climb, students rely more on financial help from loved ones to pay for tuition, room and board. If you don't need your RMDs for retirement expenses, you can put them into a tax-advantaged 529 college savings plan for a child or grandchild.

You'll pay income taxes on any RMD in the year you take it. But once that money is in the 529, earnings grow tax-deferred, and the beneficiary's withdrawals to pay qualified education-related costs are tax-free.

Down the road, if it turns out you put more RMD money into the 529 than the beneficiary needed for college, you may be able to do a 529 plan rollover to a Roth IRA that the beneficiary can use for other purposes without incurring penalties for spending the funds on nonqualified expenses.

Another strategy for spending your RMDs is buying life insurance, which can help you build a legacy that benefits either your loved ones or a cause you care deeply about.

In some situations, using RMDs to buy life insurance might result in a larger inheritance than if you put the money into other accounts. An insurance policy's cash value and tax-free death benefit might exceed the net return from another type of investment funded with the same RMDs you used to pay the insurance premiums.

Alternatively, you can name a charity as the beneficiary of your life insurance contract. Then, upon your death, proceeds from the contract will support that cause. This arrangement also may offer tax benefits, including the possibility of deductions for your premium payments.

Supporting charity is an essential value for many. You can use the deduction from donating your RMD to offset your tax liability while still doing good for causes that matter.

A qualified charitable distribution (QCD) can help you meet your RMD requirement while providing charitable intent and potential tax benefits.

Here's what to know:

Individuals older than 70½ can give up to $108,000 in 2025 (adjusted for inflation yearly) from a traditional or inherited traditional IRA tax-free.

People age 70½ and older can give a one-time gift of up to $54,000 in 2025. Gifts can go to a charitable remainder unitrust (CRUT), charitable remainder annuity trust (CRAT) or charitable gift annuity (CGA).

For the gift to count in any particular tax year, it must come from your account by Dec. 31.

If paying taxes on your RMDs throughout retirement is a concern, you might consider completing a Roth IRA conversion. This won't provide a financial benefit in the year you complete the conversion, but it can remove your obligation to take RMDs in the years that follow.

Roth IRA conversions have several advantages, including:

• Diversifying your investment portfolio
• Alleviating concerns of future tax rates
• Maintaining your current tax bracket
• Avoiding RMDs

The downside is that your taxable income will rise in the year of the conversion, and you may have to wait at least five years to withdraw the earnings on a tax-free basis.^2,3 Additionally, you must satisfy your current year's RMD requirement before the conversion.

A Roth conversion may be appropriate if you:

• Won't need the RMD income during your lifetime
• Seek the potential for continued tax-deferred growth
• Are in a lower tax bracket now compared to what you think you'll be in at your RMD age
• Believe your heirs will be in a higher tax bracket when they inherit these funds than the tax bracket you're in now

Read about the pros and cons of Roth IRA conversions for more detailed information.