The majority of adults 73 and older who have to take required minimum distributions (RMDs) -- mandatory annual withdrawals from most retirement accounts -- have already done so for 2024. However, those who turned 73 last year have until April 1, 2025, to make their first one.
RMDs aren't a big deal to everyone. You may withdraw your RMD or more just to cover your living expenses. But for some, RMDs force them to withdraw their savings earlier than they had hoped. Skipping RMDs isn't an option, though. If you do, you could pay a 25% penalty on the amount you should have withdrawn.
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It's better to take the RMD than risk these extra taxes. But you don't have to spend the money if you don't need it. Consider one of these two options instead.
Invest the money in a taxable brokerage account
If you want to keep the money for yourself but don't plan to spend it yet, consider taking your RMD, paying the taxes, and then investing what's left in a taxable brokerage account. It's not an ideal solution, but it will help your savings continue to grow.
You'll pay taxes on your RMDs today, but then you can invest them in whatever you'd like with a taxable brokerage account. If you hold onto these investments for a year or more before selling them, your earnings will be subject to long-term capital gains tax rates, which are lower than income tax rates. Many of those who fall into the lowest income tax brackets won't have to pay any long-term capital gains taxes when they take this money out.
Just be prepared to pay the appropriate taxes on your RMDs before you do this. You may want to wait to invest the funds until after you've paid your taxes for the year to ensure you have the cash on hand to satisfy the IRS.
Make a qualified charitable donation (QCD)
If you don't need the money and you don't want to deal with a larger tax bill, your best option is to make a qualified charitable donation (QCD). This is where you direct your retirement account provider to donate your RMD to a qualifying charitable organization of your choice. It's important that you do not withdraw the funds yourself and donate them. The money must not enter your hands first or it won't be a QCD, though you may still be eligible to itemize it as a charitable deduction on your tax return.
With a QCD, you still have to withdraw the money from your account, but the government will treat this withdrawal as if it never happened. Your tax bill won't increase and you'll get to help out a good cause at the same time.
Don't wait too much longer if you haven't taken your 2024 RMD. If you have questions about the best way to handle your QCD to minimize your tax consequences while preserving your savings, it's best to consult a tax professional who can give you advice for your specific situation.
