Year-End RMDs: 10 Ways to Invest, Spend or Donate Them

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Have you made arrangements for your year-end RMDs? It's a key piece of retirement planning. And it’s not exactly mad money, but an influx of cash via a required minimum distribution (RMD) from your IRA or workplace retirement plan does give you options. The money is yours, of course. So, you can do with it as you please.

But, like all things related to money, there are ways to optimize the cash that makes its way back into your checking account after an RMD.

RMDs, of course, are mandated by the Internal Revenue Service (IRS). "You cannot keep retirement funds in your account indefinitely," the IRS says. You generally must start taking these mandatory withdrawals when you reach age 73 (unless you inherited an IRA). RMDs apply to retirement accounts, such as IRAs (excluding Roth IRAs, which don’t require RMDs) and employer-sponsored 401(k)s, 403(b)s and 457(b)s. The amount of your RMDs, due each year by Dec. 31, is calculated based on your account balance from the end of last year and your life expectancy. The RMD withdrawal amount gets taxed at your ordinary income tax rate. So, what are smart ways to make the best use of an RMD payout?

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1. Use RMDs to make ends meet

If you need more money to pay the bills each month or need a lump sum to pay for a large expense, such as a car down payment or roof repair, RMD dollars can pay for these one-time or unexpected expenses. Remember, it’s better to pay bills from money that’s already been taxed, rather than, say, make another withdrawal from a taxable retirement account that results in a second taxable event.

2. Pay off expensive debt

High-interest credit card debt is the enemy of personal finance. So, if you have a high balance on plastic, use all or part of your RMD to put a dent in your debt. The average credit card rate is just under 24%, according to LendingTree. So, for every $1,000 you pay off, you can save yourself about $240 per year. If you knock out $4,000 in credit card debt, you can avoid almost $1,000 in interest.

3. Save for a rainy day

If you’re one of the 73% of Americans who told Bankrate.com that they lack the emergency savings to cover six months of expenses or more, then bulk up your rainy-day fund with a cash infusion from your RMD.

Even though the Federal Reserve cut its key borrowing rate to between 3.5% and 3.75% on December 10, the cash you can earn on your money in the best high-yield savings accounts and certificates of deposit (CDs) still outpaces consumer price inflation (CPI), which measured 2.7% in November. However, remember to account for taxes on income from CDs or savings accounts.

4. Reinvest the money

If you don’t need the cash to cover everyday expenses, pay off debt, or bolster your emergency fund, consider reinvesting the money. Why leave it in a checking account, earning less in interest than the rate of inflation? Instead, you can funnel the money back into a taxable brokerage account. You can also fund a Roth IRA if you have earned income equal to or greater than the RMD amount you contribute to the Roth IRA, according to American Century Investments. Once the dollars are invested in a Roth, you won’t have to distribute any more RMDs on the amount for the rest of your lifetime.

Another tax-saving tip is to invest the proceeds in a low-cost, tax-friendly ETF, which typically pays lower capital gains and dividends to shareholders than traditional mutual funds.

5. Reinvest RMD money to save on future taxes

Not every investment is tax-smart. "One of the biggest mistakes we see people make with RMDs is reinvesting them the wrong way," said Kris Whipple, president and financial advisor at Kristopher Curtis Financial.

Since you’re already paying taxes on your RMD, if you don’t need the money, it makes sense to invest the money in a way so that it’s not taxed again, advises Whipple. If you invest in a non-retirement account, you fall into the trap of paying taxes twice, as you will be taxed later on any gains. "You’re creating something nobody wants: more taxes," said Whipple.

A smarter approach is just to pay the tax once on your RMD money. "Reposition those funds where they’ll never be taxed again," said Whipple. One way to do that is to use RMD dollars to fund a life insurance policy. The upside to that strategy? “You can create a tax-free benefit for your heirs,” said Whipple. “You’re ensuring that the impact of taxes stops (when you pay Uncle Sam the taxes on your RMD).”

And while life insurance premiums are expensive for folks over 73, there’s a way for married couples to lower their premiums. You can invest in a Second-to-Die Guaranteed Universal Life policy. This policy only pays out after both parties have passed. “Because of this,” said Whipple, “the premiums are typically lower” than if you buy two single-life policies with the same combined death benefit.

6. Contribute to a college savings plan (529)

Even though you’ll get taxed on your RMD, you can shield the distribution from taxes going forward and help pay for your grandchildren’s educational expenses by using the funds to contribute to one of the best 529 college savings plans, said Addison Schubert, a financial consultant with American Century Investments. “A 529 allows your gift to grow tax-deferred, and withdrawals for qualifying educational expenses are tax-free,” Schubert explained.

Tip: The 529 grandparent loophole allows you to contribute to your grandchild's college fund without harming their chances for a scholarship. You could also benefit your grandchild's retirement; if they don't use all those funds on education, your grandchild could roll over funds from a 529 to a Roth IRA.

7. Gift RMD proceeds to heirs

Using RMDs to pass on wealth to heirs is a way to leave a legacy while you’re still alive.

"A frequent comment by retirees regarding RMDs is that they don’t need the money," said Rick Miller, financial planner and investment advisor at Miller Investment Management. "I advise many of them who have children that gifting them the RMD money up to the gifting limit is a way of passing on your estate sooner rather than later." The annual gift tax exclusion for 2025 is $19,000 and remains unchanged in 2026.

8. Donate proceeds to charity

If you don’t need the cash but need a tax deduction, consider giving your RMD to a charity, such as an arts foundation, volunteer fire department, or non-profit focused on fighting cancer. "Normally, distributions from a traditional IRA are taxable when received," the IRS said. "With a QCD, however, these distributions become tax-free as long as they're paid directly from the IRA to an eligible charitable organization." The maximum annual amount that can qualify for a QCD in 2025 is $108,000 per person, per calendar year.

9. Pay income taxes

If you expect to owe taxes to the IRS come April 15, your RMD might be a good source of capital to make the payment. So, don’t rule out using these freed-up funds to pay Uncle Sam at tax time.

10. Treat yourself!

If you don’t need the money to pay taxes, buy groceries or fix the car, there’s nothing wrong with using your RMD for an indulgence. You could fund a dream trip, buy a new couch you’ve been eyeing or finally spring for new stainless steel appliances to spruce up your kitchen. Or go on a shopping spree! The world's your oyster.

Adam Shell is a veteran financial journalist who covers retirement, personal finance, financial markets, and Wall Street. He has written for USA Today, Investor's Business Daily and other publications.