Can I Reinvest My Required Minimum Distribution?

With most retirement accounts, once you reach a certain age, you must take an annual required minimum distribution (RMD). This means you take a payout from your traditional IRA, 401(k) or other retirement account. The required amount is calculated based on your age and the account balance.

But what can you do with the RMD money if you don’t need it right away? Let’s say your pension or other income has already got your expenses covered for the year. If that’s the case, you may be scratching your head over what to do with the amount you are required to withdraw.

It’s a great problem to have, but it can still be a problem. Even if you’re fortunate enough not to need that money, leaving it in a checking account invites inflation risk. But you do have other options to put that RMD to work for the future.

If this is a year you need to take an RMD, read on for some suggestions on how you can potentially use the money.

Reinvest Your Required Minimum Distribution

Investors often wonder if they can reinvest the money. The answer is yes, with caveats. You can invest an RMD in a taxable investment account—but not back into most retirement accounts.

You might be able to contribute your RMD to a Roth IRA as long as you have earned income in an amount equal to or greater than the RMD amount you contribute to the Roth IRA. The RMD amount you must take is still considered taxable income in the year you take it. Roth IRAs have no RMDs during your lifetime.

Use Your RMD to Contribute to a 529 Plan

Another solution is to put your RMD into a 529 education savings plan. This way, your RMD can pay tuition or other college expenses for a grandchild or other student, such as an adult who wants to go back to school for an advanced degree. A 529 allows your gift to grow tax-deferred, and withdrawals for qualifying educational expenses are tax-free. 

To use your RMD to fund a 529, take the distribution as you normally would. Then establish an account naming the student as beneficiary and invest the money (there may be a required minimum to start the account).

You may be able to automate RMDs and 529 contributions, so that every time your RMD comes out, a contribution goes into the 529 account. Or you could make deposits into an existing 529 owned by the student or their parents.

If you do open a 529 account, you retain control of the funds. This gives you the freedom to change the beneficiary if necessary. It also gives you the option to use the funds yourself. However, the earnings portion of withdrawals not used for qualified educational expenses are subject to taxation and a penalty.

Turn Your Required Distribution Into a Charitable Distribution

Another good use for an RMD is a gift for someone else—and the gift may also let you enjoy a tax advantage. Whether it’s to an arts foundation, a volunteer fire company or an animal rescue organization, you can have your RMD check issued directly to the qualified charity of your choice. This is called a qualified charitable distribution (QCD).

QCDs can be tricky, so you may want to consult a tax professional before using your RMD this way.

Spend Your RMD

A good rule of thumb is to always pay expenses out of your RMD before you cash out other investments. That’s because you must take the RMD, while other investments could remain untouched.

But if you’ve already got the funds for your normal expenses, like your groceries, taxes and other necessities, you may want to consider using your RMD for your “extra” expenses. Take a memory-making vacation with family. Buy a fire pit. Take salsa lessons. Or make a practical investment, such as a new roof, a reliable car or a more energy-efficient furnace.

Finally, no matter how you decide to use it—or even if you still haven’t made up your mind—be sure to take your RMD by December 31. If you don’t, the IRS may impose a 25% penalty tax.