Making the Most of Your RMDs

July 1, 2025

Once you reach age 73, the IRS requires you to begin taking required minimum distributions (RMDs) from most tax-deferred retirement accounts, such as traditional IRAs and 401(k)s. While this rule ensures the government eventually collects taxes on retirement savings, it can also create new challenges—especially when it comes to taxes and income planning.

RMDs are taxed as ordinary income in the year they're taken, which can potentially push retirees into higher tax brackets, increase Medicare premiums, and subject them to the 3.8% net investment income tax (NIIT) on some of their investment earnings. These side effects can add up quickly, especially for retirees who don’t need the RMD for day-to-day living expenses.

So what can you do to make the most of your required withdrawals? Whether you plan to spend, invest, or give the money away, several strategies can help you manage the impact of RMDs—both now and in the future.

Strategies for RMDs You've Already Taken

If you’ve already taken your RMD for the year, you still have choices for how to put that money to work.

1. Spend It Thoughtfully

If the funds aren’t needed for essential expenses, they could be used for discretionary purchases—a long-awaited trip, home improvements, or helping a family member. The key is to ensure that the spending aligns with your broader financial goals and won’t jeopardize long-term retirement security.

2. Invest the RMD in a Taxable Account

Even though you must withdraw the funds from your retirement account, you can reinvest them in a brokerage account. Consider tax-efficient investments like municipal bonds or index funds with low turnover. A managed account that uses tax-loss harvesting and other tax-smart techniques might also be beneficial.

3. Gift to Loved Ones

You can gift some or all of your RMD to family members, potentially reducing your taxable estate. For 2025, individuals can gift up to $19,000 per person without incurring federal gift taxes. A couple could gift up to $38,000 to each child or grandchild, offering substantial support while potentially reducing future estate tax liabilities.

Gifting to a 529 college savings plan is another option, particularly if you have children or grandchildren approaching college age. You can make five years' worth of gifts in a single year (up to $190,000 for couples) to help fund education and possibly reduce your taxable estate at the same time.

Planning Ahead: Strategies to Reduce Future RMD Tax Burdens

Being proactive can help lessen the long-term tax impact of RMDs. Here are several strategies to consider before you hit the RMD age—or even afterward.

1. Use Qualified Charitable Distributions (QCDs)

Once you’re age 70½, you can make QCDs—direct transfers from your IRA to a qualified charity. For 2025, the limit is $108,000 per person. These charitable gifts count toward your RMD but are excluded from your taxable income, which can lower your tax bill and even reduce your Medicare premium costs.

2. Consider Donor-Advised Funds (DAFs)

DAFs allow you to make a charitable donation now (and potentially get a tax deduction), while distributing the funds to your favorite charities over time. Although DAF contributions can’t be made directly from an IRA RMD like QCDs, they may help offset the tax impact of your RMDs if you itemize deductions.

3. Explore Roth Conversions

Roth IRAs don’t have RMDs during your lifetime and offer tax-free qualified withdrawals. Converting a portion of your traditional IRA to a Roth IRA before RMD age can help reduce future RMDs. This strategy requires careful planning, as you’ll owe taxes on the converted amount, but it may pay off in the long run, especially if you expect to be in a higher tax bracket later.

Keep in mind that once you begin RMDs, you cannot convert those required withdrawals into Roth funds. However, converting amounts in excess of your RMD remains an option.

4. Think About Longevity Insurance with a QLAC

A Qualified Longevity Annuity Contract (QLAC) allows you to defer RMDs on a portion of your retirement savings until as late as age 85. This annuity offers guaranteed lifetime income and removes the invested amount (up to $210,000) from your RMD calculations. If a QLAC isn’t the right fit, other annuity options may help meet income needs while still satisfying RMD rules.

Professional Guidance Can Add Value

Navigating RMDs can be complex. From evaluating gifting limits to selecting tax-efficient investments and considering annuity options, it’s easy to feel overwhelmed. A financial advisor or tax professional can help you develop a personalized plan that reflects your unique goals and minimizes the tax bite.

Whether your goal is to reduce taxes, leave a legacy, or simply grow your wealth in retirement, how you handle your RMDs plays a critical role in your overall strategy. By thinking ahead and making thoughtful decisions, you can turn what might seem like a tax burden into an opportunity to create long-term value.

Sources:

https://www.fidelity.com/learning-center/wealth-management-insights/what-to-do-with-RMDs

Disclosure:

This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.

This material is provided as a courtesy and for educational purposes only.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.