What to do with your RMD? 5 possibilities

This article will ... Note the rules requiring 73-year-olds to take distributions from their retirement accounts. List how such distributions could be used for immediate needs. Highlight gifting options for your RMD.

You’re turning 73. It's time to begin taking required minimum distributions (RMDs) from your pretax retirement accounts, whether you need the additional income or not.

Seniors are eligible to take penalty-free withdrawals from their traditional IRA and 401(k) as early as age 59½, of course, but many choose to spend down their savings and taxable brokerage accounts first, leaving their pretax investments for last to maximize their potential for tax-deferred growth.

But, eventually, the IRS wants its share.

At age 73 (75 beginning on Dec. 31, 2032), you must begin RMDs from your pretax accounts, which get taxed as ordinary income. Remember, neither your contributions nor your earnings were ever taxed. (Learn more: Turning 73? Required minimum distributions explained)

The formula for determining your annual RMD is based on your account balance and your life expectancy as projected by the IRS. The agency provides RMD worksheets online to help you calculate your own required minimum distribution.

How you use your RMD is up to you. As with all new sources of income, you can:

• Use it to help pay for monthly living expenses.
• Pay down debt.
• Save it for a future financial need.
• Invest it for growth.
• Gift it to family members or a favorite charity to reduce your taxable estate.

Many opt to talk with a financial professional about the options. (Need to connect with one? Let us know)

In the meantime, here’s a closer look at each possibility.

Use it to help pay for monthly living expenses

Many retirees use their RMD proceeds to help cover monthly living expenses.

Those who delayed withdrawals from their traditional IRA or 401(k) during their early retirement years often welcome the infusion of extra cash.

“It all depends on the senior’s means,” said Paul Mass, president and founder of ClearView Financial Solutions in New York City. “More seniors than not use their RMDs for income and living expenses.”

IRA and 401(k) distributions can help supplement guaranteed sources of retirement income, including Social Security, pensions, and annuities. They can also help pay for medical care costs, which typically rise as seniors age.

Pay down debt

Baby boomers are the most likely of all generations to have credit card debt, with 93 percent carrying a balance. They owe a median of $4,862 in credit cards debt, with median non-mortgage debt of $18,779, according to LendingTree.¹

Carrying debt into retirement reduces the cash flow available to spend on priorities like health care and groceries, as well as wants like travel and leisure activities. It may also require seniors to draw down retirement accounts faster than planned, which could increase the risk of outliving their assets or having to downsize their lifestyle to make ends meet.

By using their RMD to pay down debt, retirees can potentially help preserve their assets for longer and protect against longevity risk. (Related: How to prevent debt from ruining retirement)

Save it for a future financial need

Those who are not in immediate need of extra income might instead choose to simply save their RMDs for a specific goal, such as a full family trip to Africa or a home remodeling project, so they can age in place. (Related: Projecting age-in-place costs)

Or, they can park their distribution in a liquid, interest-bearing account for a surprise expense or emergency.

Retirees who maintain an oversized emergency fund, with enough cash to cover their living expenses for one to two years, can potentially help insulate themselves from downside risk. By drawing from their cash stash when the stock market declines instead of selling shares and locking in losses, they give their investments time to recover.

An emergency fund might also enable retirees to take more financial risk in their investment portfolio to reach for growth.

Invest it for growth

Indeed, depending on their savings, expenses, and guaranteed sources of income, retirees might consider putting their RMDs back to work. For example, they can:

• Invest it in a taxable brokerage account.
• Fund a Roth IRA, where earnings grow tax-free. But tread carefully here. You cannot directly use your RMD proceeds to contribute to a Roth IRA, because Roth IRAs must be funded with “earned income.” Investment proceeds, capital gains, and other sources of passive income cannot be used. If you are eligible to contribute to a Roth IRA based on your earned income, however, you can potentially take an amount equivalent to your after-tax RMD from other accounts and use that to fund your Roth IRA. Roth IRAs are not subject to mandatory withdrawals during the owner’s lifetime, making them a potentially advantageous wealth-transfer vehicle. In 2025, those 50 and older can contribute a total of $8,000 to an IRA. (Related: Backdoor and mega-backdoor Roths: Who they’re for, and how to use them)

• Fund a 529 college savings account for their grandchildren. The distribution would still be subject to taxes, but the earnings in a 529 account then become tax-free if used for qualified educational expenses. Thanks to new rules for financial aid that took effect in 2024, 529 accounts owned by someone other than the beneficiary’s parent will no longer affect the child’s eligibility for need-based financial aid. (Related: Possible college gifting moves for your grandchildren)

When considering strategies to reinvest their RMDs, retirees should consult a financial professional who can offer valuable guidance on the pros and cons of each.

Give it away

Retirees who prioritize leaving a financial legacy behind, either to loved ones or a favorite charity, might also consider gifting their RMD. But they should keep tax-efficiency in mind.

• The IRS allows donors to gift up to $19,000 tax-free per year ($38,000 for married couples) to as many people as they wish. If you are married and have two children and four grandchildren, you could potentially gift up to $228,000 tax-free each year.
• Seniors who are healthy enough to qualify for coverage might also consider using their RMD dollars to purchase a permanent life insurance policy that guarantees a tax-free death benefit to their heirs, said Jesus Pineda, a financial professional with Legacy Avenue in Scottsdale, Arizona. “Not only are we creating a more tax-efficient legacy for their heirs, but also giving the policyowner permission to spend all of their qualified assets, since their legacy goals are being guaranteed with the life insurance,” he said, noting that some hybrid life insurance policies offer long-term care benefits, as well. (Learn more: How life insurance provides 3 tax advantages)
• Retirees can also send their RMD directly to a charity of their choice to maximize their charitable impact, said Mass. In 2025, the IRS allows IRA owners age 70½ or older to transfer up to $108,000 to charity tax-free each year in what is known as a Qualified Charitable Distribution (QCD).² “But for those age 73 or older, a QCD can be used to satisfy their RMD,” said Mass, noting that distributions become tax-free as long as they’re paid directly from the IRA to an eligible charitable organization. (Learn more: A charitable move with tax and RMD benefits)

Here again, an estate planning attorney or financial professional can offer valuable guidance on how to gift tax effectively.

Conclusion

The day that RMDs begin marks an important milestone for retirees.

Depending on their income, expenses, and unique financial goals, it may make sense to use those dollars to pare down debt or fortify their emergency fund. They might also opt to invest their distributions or donate it to people and causes they care about.

By working closely with trusted professionals, they can help develop a plan to put those dollars to work in a way that’s right for them.

Discover more from MassMutual…

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Need a financial professional? Find one here

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