How Can I Reinvest My Required Minimum Distributions From My Retirement Plan?

You’ve taken a distribution from your IRA or another qualified retirement plan.  But, if you don’t need the required minimum distribution funds right now, you may be wondering. How can I reinvest my required minimum distribution into a Roth IRA, or elsewhere? 

The good news is that in some cases, you can reinvest your retirement plan distributions back into a Roth IRA, but in most situations you cannot put your RMD’s back into the account it came out of.

Assume that your pension, social security or other retirement income sources have already paid your retirement expenses for the year. If that’s the case, you might be stumped as to what to do with the money you’ll have to distribute from your IRA, 401(k) or other tax-advantaged retirement plan.

Even if it’s a fantastic problem to have, having too much income, it can still be a problem. Even if you don’t need the money, leaving it in a checking account exposes you to the risk of inflation. 

Never fear: I’ve got some suggestions for how you can put your RMD to good use in the future.

Intro: Spend it, Reinvest it, Roth IRA, 529, Charitable Contribution

If you have reached retirement age, you are required to take minimum distributions (RMDs) from your tax favored retirement account each year starting at age 72. There are several ways that you can reinvest your RMDs.

• The first and most obvious thing to do with your RMDs is to spend it. Whether that is on ordinary living expenses, or more lavish spending such as a family trip somewhere. I consider this “reinvesting into memories to last a lifetime“
• One way is to reinvest the money is into a taxable account, any non qualified retirement account that you invest in will do. This way, you can still earn income on the money, or allow it to continue to grow. The downside is that these accounts will no longer be tax deferred, but you will also not be forced to take a minimum distribution from this account either.
• Another way to reinvest your RMDs is to make a charitable distribution. This allows you to donate the money to a charity of your choice and receive a tax deduction for the amount donated. You can write a check directly to the charity, or have your RMD check directly issued to the charity of your choice directly. The direct method is preferred, and is called a qualified charitable distribution (QCD).
• If you are the original owner of the retirement account, you may also reinvest the money back into a Roth IRA account – only if you have earned income for the year, and your contribution can only be up to the earned income or the maximum annual contribution limit. This will allow you to continue to grow your retirement savings without having to pay taxes on the distributions in the future.
• Another popular reinvest many retirees choose to do with unneeded RMDs is to invest in a 529 college savings plan for their grandchildren. This is a way to reinvest in the future.

Click any of the below for further related reading of your choice:

1. All of Your RMD Questions Answered?

2. How To Calculate Your RMD?

3. What to Do With RMDs You Don’t Need?

How Can I Avoid RMDs? Rollover or Conversion

If you are asking about putting your minimum distributions back into your account, wouldn’t it be obvious to first ask if there is any way to AVOID taking a distribution in the first place?

Technically, no you cannot avoid taking required minimum distribution RMDs.  They are a requirement.  This is because you have deferred the taxes on this income up until now.  So the IRS requires us to withdraw the funds at a certain point.

But since I am asked all the time – how can I avoid RMDs? 

Here are two secrets:

1. Convert it all to a Roth IRA and pay the taxes now.  You will never again have to take an RMD.  Painful – but you did ask how to avoid them, right? Obviously I need to suggest you speak with a tax professional for tax advice and a financial advisor for investment advice before making such a move.
2. A second option – to actually avoid taking RMDs ever again.  Invest really, really poorly.  Until your account goes to zero.  RMDs are based on your account balance.  So an RMD on a zero balance account, is zero.

Neither of these are painless options.  Especially the second option, no one would purposely choose that one.  

My point with the zero balance option is – RMDs aren’t all that bad.  Especially when you have to take a large one.  Sit back and enjoy it, the minimum withdrawal rate.  

Large RMDs means you are more than content, that ‘you have too much money’.  A much easier problem to solve than having too little income.  But still a problem, so let’s solve it for you.

When Should You Take RMDs From Retirement Accounts?

Before we get started, let’s see if you even need to be concerned about RMDs this year in the first place. 

Most retirement funds require you to take an annual required minimum distribution RMD once you reach a particular age. The required beginning date (RBD) previously was age 70 ½.  It is now age 72, and eventually will be at age 75.  Read my recent article about RMD changes and the SECURE ACT here.

• The required amount is determined by your age and the balance in your account.
• If you were born after July 1, 1949, you must begin taking an RMD at the age of 72. 

Use these RMD calculators to calculate your RMD for this year and future years. 

• Charles Schwab Traditional IRA Calculator
• Investor.gov SEC RMD Required Minimum Distribution Calculator
• TD Ameritrade RMD Calculator

Read my recent article about RMD Calculators and another about the new IRS life expectancy tables for 2022.

If you have to take an RMD this year, keep reading for some ideas on how to reinvest your RMDs and put the money to good use.  You can also read my recent article Strategies for RMDs That I Don’t Need.  In this article I discuss ways to use the RMDs such as contributing to a 529 Plan to help plan for college and education expenses or making a charitable gift with a QCD.

Most financial advisors suggest that you use your RMDs to fund your living expenses first – since they are required.  And leave your remaining stocks, mutual funds, ETFs, bonds and other investments untouched for as long as possible 

What if you already have enough money to cover your regular bills?  You might want to consider using your RMD for a treat. After all, that is what retirement is for. Take a vacation with your family, learn how to salsa, buy a new electric car.

Can I Reinvest My Required Plan Distribution

You may wonder, can I reinvest my required minimum distribution? The answer is yes, and comes with a BUT

The simple answer: An RMD can be reinvested back into a taxable investment account, but not back into a tax-advantaged retirement account.  (in some cases, you can reinvest back into a Roth IRA though)

If you are the owner of the account from which you must take a required minimum distribution RMD, you can not reinvest your RMD back into the same account.

RMDs should be reinvested in a taxable account.

Depositing your unused required minimum payout into a taxable brokerage account is the simplest choice for reinvesting it. You can still earn a comparable rate of return, even if you don’t have access to the tax benefits of an IRA.

The new issue you’re dealing with is the account’s tax management. You’ll now need to account for long and short term capital gains, as well as any taxable dividends or interest payments you receive from your investments.

However, this doesn’t have to be a major issue. Passive investing in index funds or ETFs, taking advantage of tax-loss harvesting, and avoiding investment strategies that generate taxable income can all help you keep your investment taxes low. I

If you are in a high tax bracket, tax-free municipal bonds may be a suitable option as well. Or even inflation savings bonds!

How To Reinvest RMD Funds

There are a few things to consider when to reinvest your required minimum distribution RMD.

• First, you will need to decide what type of account you want to reinvest the money into. 
• Once you have chosen an account, you will need to set up a plan for how you will reinvest your required minimum distribution. 
• Be sure to consider your goals and risk tolerance when creating your reinvestment objectives and plan.

Remember, your RMD is required by law. So be sure to take out the RMD each year. You can reinvest the money in another account, but you will still need to take out the required amount.

Ultimately, it is important to speak with a tax advisor and a financial professional to see what options are available to you and to make sure that you are making the best decision for your unique situation.

Can You Re Invest into a Roth IRA

Yes, you can reinvest your RMDs into a Roth IRA. As long as you are eligible to contribute to a Roth IRA.

• However, in order to transfer an RMD distribution to an IRA, you must complete the other IRA contribution requirements.
• The most significant stumbling block for most RMD recipients is that an IRA contribution cannot exceed the taxpayer’s earned income for the year. 
• Earned income is ‘money earned through work or self-employment‘. Annuities, pensions, and investment income are not included.
• So you can’t contribute to an IRA unless you have a job or a business that earns you earned income.
• However, if you have “too much” income and are currently covered by an employer retirement plan, the ability to contribute may be reduced or not available.

Now, if you are working – you MAY be able to avoid RMDs anyway. 

You do not need to take RMDs from the 401k from your current employer.  So may be able to avoid RMDs if you are eligible to roll over your old 401k to your current one!!

If you are currently working, but still need to take an RMD, then you cannot simply transfer your RMD into a Roth IRA.  You must withdraw your RMD: pay taxes, THEN contribute to a Roth IRA (if eligible).

You must, however, keep in mind the contribution restrictions and earned income requirements.

• Individual retirement account (IRA) holders can contribute a total of $7,000 in 2022, if you’re 50 or older.
• Income limits set by the Internal Revenue Service (IRS) govern whether or not a person is eligible for a Roth IRA.
• Before converting a regular IRA to a Roth IRA, RMDs must be removed.

A Roth IRA is an individual retirement account that is funded with after-tax dollars. This means that you will not get a tax deduction for contributions made to a Roth IRA, but withdrawals may be tax-free down the road.

An RMD cannot be made directly to a Roth IRA. You cannot reinvest an RMD directly into any type of retirement accounts.  The IRS, on the other hand, expressly forbids this.

Any RMD for the year must be taken and included in gross income before the individual can convert all or part of an IRA or other tax-advantaged retirement account to a Roth IRA. 

If you have earned income equal to or greater than the RMD amount – you may be allowed to contribute your RMD to the Roth IRA. Indirectly.  

The Internal Revenue Service (IRS) mandates that you have sufficient earned income to meet your Roth IRA contribution for the year, but your contribution does not have to come directly from your paycheck.

• Take out your RMD, and pay taxes on the withdrawal as ordinary income
• Use those proceeds, and contribute to a Roth IRA, if eligible
• You have indirectly taken your RMD and reinvested it into a Roth IRA.
• This will allow the money to potentially grow tax deferred and never be taxed again.
• This may be a good way to create some tax diversification in one’s retirement portfolio. 

Source: Internal Revenue Service (IRS)

Roth Conversion with RMDs

So, I may or may not be eligible to indirectly reinvest my required minimum distribution into a Roth IRA? It is based on income.

And I haven’t discussed a full blown Roth IRA Conversion (teaser – wink wink).

How can we bridge that gap?

One of my favorite strategies in working with clients as a Financial Planner was to use RMDs to pay the tax and do a partial Roth conversion.

If you have to take a $10,000 RMD and don’t necessarily need it.  Convert enough of your IRA to CAUSE a $7,500 taxable event.  While it may seem strange to increase your tax burden on purpose now, it may help you cut it later. You are, in a sense, reinvesting your RMD in a smaller tax bill.

I will use a random, over simplified example to explain

• You are in the 25% tax bracket
• Let’s say you have to take a $10,000 RMD this year.
• So you withhold 25% for taxes and deposit the $7,500 in your checking account.
• You then turn around, after discussing it with your financial and tax advisors, to convert $30,000 of your IRA into a Roth IRA.
• If you are in the 25% tax bracket, you will owe about $7,500 in taxes, right?
• You have indirectly taken your RMD and turned it into $30,000 of a Roth IRA.  Which if managed properly will grow tax free, and be inherited tax free by your heirs.
• As opposed to ithe retirement money continuing to grow in your traditional IRA and being a large tax bomb down the road.

Rinse and repeat each year that you can.

Why am I going so deep into this strategy?  Because in the last year alone, these are verbatim the questions I have been asked from different people”

• Can RMD be used for Roth Conversion?
  • Only the portion of a traditional IRA that remains after the RMD can be converted to a Roth IRA.
• Can IRA RMD be converted to Roth 50/55
  • You may want to consider converting a portion of your IRA RMD each year to spread out the tax liability. This way, you can minimize the impact of the taxes owed. You will also want to make sure that you have the funds available to pay the taxes, as they are due when you file your return.
• Can you take RMD and put it into Roth?
• Can you put RMD into a Roth IRA?
• Can a required minimum distribution be rolled over?
• Can I rollover my RMD to a Roth IRA? * Be sure to meet the 60-day rollover requirement or do a direct rollover.
• Can the required minimum distribution be converted?

Full Roth IRA Conversion to Eliminate RMDs on Your Retirement Money

If you don’t need the retirement income from your IRA, and have some unneeded retirement dollars as well – consider converting all, or a portion, of your Traditionally IRA to a Roth IRA.

The advantage of doing so is

• Roth IRA does not require annual automatic withdrawals, or minimum distributions RMDs, like a traditional IRA does.
• You have effectively transferred non tax-advantaged retirement accounts to grow tax free in a Roth IRA
• If properly managed, your heirs may inherit the Roth IRA income tax free as well.

The disadvantage is that you are paying the taxes now, instead of over time.  Or having your heirs pay the taxes.

Overall, converting an IRA RMD to a Roth IRA can be a good option for some taxpayers. It is important to consider all of the factors involved before making a decision, such as how much you will owe in taxes on the conversion.

You will want to speak with a tax professional for tax advice and get some straight forward advice, to see if this is a good option for you. Below are three different online Roth IRA Conversion Calculators that you may consider taking a look at.  These may help you decide if you want to look into a conversion more closely or not.

Super simple Roth Conversion calculator

A moderate one – Fidelity Roth Conversion calculator

A very detailed Roth IRA conversion calculator 

Still Looking to Avoid RMDs?

I won’t go too deep into this strategy in this article.  But if you are looking to avoid the taxes on your RMDs entirely, look into Qualified Charitable Distributions QCDs.

QCDs allow retirees to donate their RMD to charity directly from their retirement account. This allows individuals to avoid paying ordinary income taxes on the RMD while still supporting their favorite charities. If you’re a philanthropist, this is a fantastic—and often overlooked—option.

Speak with a professional advisor – your financial planner, tax advisor and estate planning attorney to ensure this strategy makes sense for you.  And to answer any questions you may have.

Final Thoughts

Is it possible for me to reinvest my required minimum distribution?

Yes, indirectly.  But you must be cautious in your approach. An RMD cannot be deposited into another retirement plan, but it can be reinvested in a taxable account. We discussed different ways you can then leverage this into a Roth IRA.

RMDs are not required for Roth IRAs during the account owner’s lifetime. If you don’t need the money right now, you can leave it in your Roth to grow tax-free for your heirs. Traditional IRAs don’t offer the same level of flexibility, and you must begin taking RMDs at the age of 72, whether or not you desire the money.

So instead of looking at ways to reinvest your RMDs, consider transferring as much of your IRA to a Roth IRA.  Whether you do this incrementally by using your RMDs to pay the conversion tax each year.  Or if you have a taxable account you can sacrifice to do a full conversion today.

Speak with your financial advisor and tax advisor before making any decisions on how to proceed.

FAQ

Check the latest edition of free IRS Publication 590-A, “Contributions to Individual Retirement Arrangements (IRAs)” for details.

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Note: The content provided in this article is for informational purposes only and should not be considered as financial or legal advice. Consult with a professional advisor or accountant for personalized guidance.

Additional Sources

1. Internal Revenue Service. “Retirement Plan and IRA Required Minimum Distributions FAQs.”
2. Internal Revenue Service. “Roth IRAs.”
3. Internal Revenue Service. “Retirement Topics — IRA Contribution Limits.”
4. Internal Revenue Service. “Amount of Roth IRA Contributions That You Can Make for 2022.”