Let’s talk about RMDs, the Required Minimum Distribution from various retirement savings where you contributed pre-tax dollars. The IRS says you can only sit on the investment for so long before you’re required to make a withdrawal; but what do you do if you don’t need the funds? We’ve compiled a few ideas of ways you can intentionally use your RMD funds when you otherwise don’t need them to cover your expenses.
This conversation centers on taxes. Required Minimum Distribution (RMD) rules are designed to ensure retirees begin paying income taxes on tax-deferred retirement savings once they reach age 73 (75 for individuals born in the 60s). RMDs apply to Traditional IRA, 401(k), 403(b), SEP, and SIMPLE retirement plans (1). The ruling does not apply to Roth retirement accounts because income tax was paid on the funds before they were deposited into the Roth account, making withdrawals tax free.
So, if you’re required to withdraw the funds, and you want to remain tax conscious in your retirement, you’ll need a plan. We’re laying out a few options to consider when it comes to putting your RMD funds to good use.
Qualified Charitable Distributions (QCDs)
If charitable giving is already part of your life, a QCD allows you to direct up to $100,000 per year from your IRA to a qualified charity once you reach age 70½. The amount sent directly to the charity satisfies your RMD but is excluded from your taxable income. This can help reduce overall income while also potentially lowering Medicare premiums, ultimately lowering the amount paid in taxes for the year.
Funding Grandkids’ 529 Plans
Using RMD dollars to contribute to a grandchild’s 529 plan won’t eliminate the tax on the withdrawal, but it can positively redirect the required income into a tax-advantaged growth account. If education funding is a goal; then you may view this as a multi-generational planning opportunity.
Paying Life Insurance Premiums
Some retirees use RMD income to fund life insurance premiums, particularly when the goal is to leave a tax-efficient legacy. While the RMD remains taxable, the thought process is to pass on the money in a form that will be tax-free to the beneficiary in the form of a life insurance death benefit. The goal is to offset the likely tax burden an heir may face from an inherited retirement account.(2)
Taxable Investing with Estate Planning in Mind
Reinvesting RMD funds into a taxable brokerage account keeps your money working while shifting it into assets that may receive a step-up in basis at death. Though you’ll pay tax on the distribution, future capital gains treatment may be more favorable than ordinary income rates. This can create greater flexibility for both you and your heirs.
Gifting Strategies
RMD funds can be intentionally used for annual exclusion gifts to children or grandchildren. Even though you cannot avoid the income tax on the distribution, you can move assets out of your estate in a controlled, tax-aware manner. For families focused on legacy planning, this keeps wealth transfer structured and strategic.
Roth Conversions Before RMD Age
One of the most proactive RMD strategies happens before reaching RMD age. Converting portions of traditional retirement assets to a Roth IRA in lower-income years can reduce future RMD amounts and create tax-free income later. This approach requires careful planning but can significantly improve long-term tax efficiency in retirement.
Intentional Spending in Retirement
We hope this list of ideas has gotten your wheels turning towards being intentional with your extra money in retirement. Because each option comes with a tax implication, we encourage you to dig into options that align with your values and run them by your financial advisor to ensure your decision will have the intended impact (and not come with an added surprise at tax time).
If you’re interested in discussing further, schedule a time that works for you with Foundation Wealth Management Advisor today:
About Foundation Wealth Management
Foundation Wealth Management is a CPA-led organization that provides financial planning
services and tax planning support; services and outcomes vary based on each client’s
circumstances. Our team includes qualified professionals, such as CPAs and CFP®s, who
are integral to our service offerings. Our team includes 3 Certified Financial Planners: Burt
Hutchinson, CPA, CFP®, Paul LaViola, CFP®, and Stephen McDade, CFP®.
As fee-only financial planners, we are compensated directly by clients rather than through
commissions from brokerage or insurance products, which we believe helps align our
services with client goals.
Sources:
- Retirement plan and IRA required minimum distributions FAQs | Internal Revenue Service
- Retirement topics – Beneficiary | Internal Revenue Service
Disclosure Statement:
This presentation is not an offer or a solicitation to buy or sell securities. The information contained in this presentation has been compiled from third-party sources and is believed to be reliable; however, its accuracy is not guaranteed and should not be relied upon in any way whatsoever. This presentation may not be construed as investment, tax, or legal advice and does not give investment recommendations. Any opinion included in this report constitutes our judgment as of the date of this report and is subject to change without notice. All investments are subject to risk, including the possible loss of principal.
The client scenarios presented in this blog are entirely fictional and created solely for illustrative purposes. Any similarities to actual persons, entities, or events are purely coincidental and unintentional.
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