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Can I Reinvest My Required Minimum Distribution?

An older man sitting at his desk.

With most retirement accounts, once you reach a certain age, you’ve got to take what’s called an annual required minimum distribution (RMD). This means you take a payout from your 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 you may not need right then? 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. Never fear: We’ve got some ideas about how you might want to put that RMD to work for the future.

When Do You Need to Take RMDs?

Before we dive in let’s figure out whether you need to worry about RMDs this year. If you were born on or after July 1, 1949, you must take an RMD starting at age 72. To figure out your RMD for this and future years, use our RMD calculator. 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 the Money

You may wonder, Can I reinvest my required minimum distribution? The answer is yes, with caveats. You can invest an RMD in a taxable investment account—but not back into most retirement accounts. We can help you choose investments that match your goals.

You might also 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.

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, like an adult child 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 a g 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 an RMD comes out, a contribution goes in the 529 account.

Or you could make deposits into an existing 529 owned by the student or his or her parents.

Opening a 529 Account

If you open your own 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.

Spend It

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 a splurge. That’s what retirement is for, after all. 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.

Give It Away—to Charity

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

A Few QCD Basics

The maximum annual amount that can qualify for a QCD is $100,000 per person, per calendar year. QCD amounts are excluded from your taxable income. This is especially valuable if you take the standard deduction on your tax return. With the standard deduction, most other charitable donations are no longer tax deductible. Check for more specifics.

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

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 gets half of what you should have withdrawn. 

Need help figuring out what to do with your RMD?

We’re here to help.

2020 and 2021 Roth IRA Rules, Contribution and Income Limits, The Balance, December 29, 2020.

This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

IRS Circular 230 Disclosure: American Century Companies, Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with American Century Companies, Inc. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.

This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.

Please consult your tax advisor for more detailed information regarding the Roth IRA or for advice regarding your individual situation.

Taxes are deferred until withdrawal if the requirements are met. A 10% penalty may be imposed for withdrawal prior to reaching age 59½.