Three Strategic Methods for Managing Your Mandatory Minimum Distribution (MMD) in Retirement
Saving for retirement in an IRA or 401(k) is a smart move due to the tax advantages. You can enjoy tax-deductible contributions and tax-free investment growth, making these accounts an effective tool for building retirement savings. However, the party eventually comes to an end when the IRS starts demanding its share in the form of required minimum distributions (RMDs). Anyone aged 73 or older must take an RMD by the end of the year, and failing to do so can result in hefty penalties.
If you've saved a considerable amount for retirement and now find yourself with a larger-than-necessary RMD, you might be wondering what to do next. Here are three strategies to maximize your retirement savings and minimize taxes with your RMD.
IRA or
1. Reinvest your RMD
401(k) comes with a big advantage. Any contributions you make are tax deductible in the year you make them. On top of that, you don't pay any taxes on your investments until you withdraw money from your accounts. Those tax advantages make retirement accounts a great way to build your retirement savings throughout your career.
Just because you must withdraw funds doesn't mean you can't keep those assets invested. In fact, it's preferable to leave your heirs a large taxable brokerage account instead of an IRA, which would be subject to RMDs and potentially inheritance taxes.
required minimum distribution, or RMD, from their accounts by the end of the year. Failing to take an RMD on time comes with stiff penalties of up to 25% of the amount you were required to withdraw. Even beneficiaries holding an
You can take an in-kind distribution, where your investments are transferred to your taxable brokerage account without selling them first. In that case, your cost basis will be the current value of the investments when they are transferred. It's essential to ensure that the in-kind transfer fully covers your RMD to avoid any penalties.
inherited IRA could be subject to RMDs.
Taking your RMD early in the year can also provide some benefits by giving your taxable investments more time to grow.
2. Utilize Charitable Donations
step-up in cost basis reducing the tax burden for your heirs.
If you're charitably inclined and your RMD exceeds your living expenses, you may want to consider making donations to charitable organizations. Instead of withdrawing cash from your IRA, you can use a qualified charitable distribution (QCD) to donate directly to eligible charities.
it makes sense to take your RMD early in the year. You can reasonably expect your investments to increase in value over time. Taking your RMD to reinvest early in the year means you can withdraw more of your investments from your account, reducing future RMDs and giving your taxable investments more time to grow.
A QCD counts toward your RMD, and you can donate up to $108,000 in 2025. This strategy allows you to avoid higher taxes without the need to itemize deductions to receive tax savings, a particularly useful tool for most seniors who opt for the standard deduction.
roll over those accounts into an IRA.
3. Pay Estimated Taxes with your RMD
tax deductions to get the tax savings for your charitable contribution. Considering a married couple in their 70s can take a standard deduction of $33,200 in 2025, most seniors will likely take that if they don't have itemized charitable contributions. Additionally, since the QCD doesn't affect your
Many retirees are responsible for paying estimated taxes throughout the year, especially if they don't have any tax withholding from a paycheck. By allocating a portion of your RMD for tax withholding, you can avoid underpayment penalties and ensure sufficient funds for satisfying your tax liability.
adjusted gross income, you could qualify for lower Medicare Part B premiums and reduce the taxes on your Social Security income.
Adapting these strategies can help you make the most of your retirement savings while managing taxes in your golden years.
- If you have saved a substantial amount for retirement and find yourself with a larger-than-necessary required minimum distribution (RMD), you might consider reinvesting your RMD to minimize taxes.
- Utilizing charitable donations through a qualified charitable distribution (QCD) can be an effective strategy for those who are charitably inclined and have an RMD exceeding their living expenses, as it allows you to donate directly to eligible charities and avoid higher taxes.
- Retirees who are responsible for paying estimated taxes throughout the year can allocate a portion of their RMD for tax withholding to avoid underpayment penalties and ensure sufficient funds for satisfying their tax liability.
- It's essential to note that tax-deferred retirement accounts like IRAs and 401(k)s are subject to required minimum distributions (RMDs), and failing to take an RMD on time can result in stiff penalties of up to 25% of the amount you were required to withdraw.