As a financial planner for nearly 30 years, I saw the same look of surprise on my clients’ faces when they hit their 70s. After a lifetime of diligent saving, the IRS suddenly required them to start withdrawing money from their tax-deferred retirement accounts. Whether they needed it or not. This is the reality of the Required Minimum Distribution (RMD).
So, what do you do with required minimum distributions that you don’t need?
For many retirees whose daily expenses are covered by pensions or Social Security, this forced withdrawal feels like a solution in search of a problem. RMD’s become a mandatory income bump that can trigger a cascade of unwanted tax consequences.
The good news? An unneeded RMD isn’t a problem; it’s an opportunity. Doing nothing isn’t neutral; it’s choosing to pay more tax than you need to, which is money that won’t be going to your charity or your family.
This is the playbook I used with hundreds of clients to transform this obligation into a strategic financial win. We’ll go beyond the basics and give you a clear framework for making the smartest possible move with your money.
📌 Key Takeaways on Managing Unneeded RMDs
- You Cannot Reinvest an RMD into an IRA: The most common question I get is, “Can I just put it back?” The answer is no. Once an RMD is taken, it cannot be rolled back into any tax-advantaged retirement account.
- The QCD is the Most Powerful Tax Strategy: For those who are charitably inclined, the Qualified Charitable Distribution (QCD) is the single most tax-efficient strategy, as it allows you to satisfy your RMD without the distribution ever hitting your taxable income.
- Beware the “Tax Torpedo”: An unneeded RMD isn’t just taxed once. It can increase your income enough to make more of your Social Security benefits taxable and trigger higher Medicare premiums (IRMAA), creating multiple layers of new costs.
The 3 Smartest Things to Do With Unneeded RMDs: Give, Grow, or Gift
When you have an RMD you don’t need for living expenses, your decision-making process should be guided by your primary goal.
Over my career, I found that every successful strategy fell into one of these three categories.
Strategy 1: Give It (The Qualified Charitable Distribution)
For retirees with a philanthropic heart, the Qualified Charitable Distribution (QCD) is a grand slam. It is, without a doubt, the most tax-efficient way to handle unneeded RMDs.
A QCD allows you to transfer up to $108,000 (for 2025) per year directly from your Traditional IRA to a qualified 501(c)(3) charity. This direct transfer satisfies your RMD requirement, but the brilliant part is that the money is never included in your Adjusted Gross Income (AGI).
🔍 Explained Simply: QCD vs. Donating Cash
A QCD is far superior to taking your RMD, paying taxes on it, and then donating the after-tax cash. With a QCD, you use pre-tax dollars for your donation and completely avoid the income tax hit, which also keeps your AGI lower for Medicare premium calculations. It’s a direct, pre-tax tunnel from your IRA to your chosen charity, as detailed in IRS guidance on QCDs.
Strategy 2: Grow It (Reinvesting Your RMD)
If your primary goal is to continue growing your wealth, you can reinvest your RMD. But remember the cardinal rule: you cannot put it back into an IRA or another tax-deferred account.
Instead, you take the distribution, pay the necessary income taxes on it, and then reinvest the net amount into a taxable brokerage account.
💡 Michael’s Tip: Use Smart Asset Location
When you reinvest, be strategic. A taxable brokerage account is the best home for tax-efficient investments like growth stocks or broad-market ETFs, which are taxed at lower long-term capital gains rates. This is a core principle of smart asset allocation that many retirees overlook.
Strategy 3: Gift It (Legacy & Family Planning)
An unneeded RMD provides a wonderful opportunity to support your family’s financial goals. You can use the after-tax proceeds from your RMD to:
- Fund a 529 College Savings Plan: You can contribute up to the annual gift tax exclusion amount ($18,000 for 2024) per grandchild without any gift tax implications.
- Fund a Roth IRA for a Working Grandchild: If your grandchild has earned income, you can gift them money to fund their own Roth IRA, giving them a powerful head start on their own retirement savings.
⚠️ Myth Busted: “You Can Convert Your RMD to a Roth IRA”
This is a dangerous and common misconception. You are **not allowed** to convert the specific dollars you are required to withdraw for your RMD into a Roth IRA. According to the IRS, you must satisfy your RMD for the year *before* you can convert any additional funds from a traditional IRA to a Roth IRA.
A Planner’s Comparison: Which Strategy is Right for You?
Choosing the right strategy depends entirely on your personal financial goals. This table breaks down the decision-making process.
| Strategy | Best For… | Tax Impact | Michael’s Take |
|---|---|---|---|
| Give It (QCD) | Charitably-inclined retirees who want maximum tax efficiency. | Excellent. The RMD is completely excluded from your taxable income. | This is the most powerful and elegant solution if you already donate to charity. It’s a true win-win. |
| Grow It (Reinvest) | Building wealth for yourself or your heirs. | Neutral. You pay ordinary income tax on the RMD now, then capital gains tax on future growth. | This is the default choice for most people. It keeps your money working for you, but requires a smart capital gains tax strategy. |
| Gift It (Legacy) | Supporting the next generation’s education or retirement. | Neutral. You pay ordinary income tax on the RMD, but the gift itself is typically not taxable. | A wonderfully impactful choice that can leverage the power of compounding for your grandchildren in a 529 plan. |
What About a QLAC? The Advanced RMD Strategy
For those looking for more advanced techniques, a Qualified Longevity Annuity Contract (QLAC) is an option. A QLAC allows you to use a portion of your IRA or 401(k) funds (the lesser of 25% or $200,000) to purchase a deferred annuity that will start paying out much later in life (e.g., age 85). The money used to purchase the QLAC is excluded from your RMD calculations until the payments begin.
📚 Dig Deeper into RMDs
- Find out if your RMD is considered earned income
Learn the critical tax distinction that impacts your ability to contribute to an IRA in retirement. - What happens if you miss the RMD deadline?
Discover the steep penalties for missing a distribution and the steps you can take to fix the mistake. - Understand the complex RMD rules for an inherited IRA
The 10-year rule changed everything for beneficiaries; make sure you know how it applies to you.
Now, try searching for: RMD calculator, inherited IRA rules, or Roth conversion strategies.
Conclusion: Turn an Obligation into an Opportunity
An unneeded RMD is a clear sign of a successful life of saving. By treating it not as a tax burden but as a strategic asset, you can further enhance your financial security, support the people and causes you care about, and build a lasting legacy.
The key is to move from being a passive rule-follower to an active manager of your retirement income. By using the strategies in this playbook, you can turn this annual obligation into a powerful financial opportunity.
- Sharing the article with your friends on social media – and like and follow us there as well.
- Sign up for the FREE personal finance newsletter, and never miss anything again.
- Take a look around the site for other articles that you may enjoy.
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.
