What's the most critical age for retirees after their retirement date? A good case can be made for age 73. Anyone who has money in a tax-deferred retirement account such as a traditional IRA or a 401(k) plan must begin withdrawing required minimum distributions (RMDs) once they reach age 73.
Some retirees use the money to pay their bills or go on vacations. However, others put their RMD to work by reinvesting it. If you're in the latter category, here are five things you need to know about reinvesting your RMD as a retiree.
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1. You must pay taxes on your RMD
All RMDs you receive are taxable. The second the money leaves your tax-deferred retirement account, it becomes taxable income for you – regardless of what you do with the RMD.
However, there's good news for some retirees. Nine states don't tax income at all. If you live in one of the following states, you won't have to pay state taxes on your RMD (although you could still owe federal taxes):
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
Additionally, four other states have income taxes but don't tax retirement income. If you live in one of these states, you won't have to pay state taxes on your RMD, either:
- Illinois
- Iowa
- Mississippi
- Pennsylvania
2. You can't roll over the money back into another tax-advantaged retirement account
On a similar note, the Internal Revenue Service (IRS) won't allow you to roll over money received from an RMD into another tax-advantaged retirement account. Many retirees instead put their RMD into a taxable brokerage account. They can then invest in stocks, bonds, exchange-traded funds (ETFs), or other assets.
There's one exception to this limitation, though. You can reinvest your RMD into a Roth IRA (assuming you meet the eligibility requirements). A key difference between a Roth IRA and a traditional IRA is that you must pay taxes on all contributions.
3. You can still invest your RMD in tax-efficient ways
That sets the stage for the next important thing to know about reinvesting your RMD. You can still invest the money in tax-efficient ways even though you can't roll it into a traditional IRA or a 401(k).
The Roth IRA is an excellent example of this. All contributions to a Roth IRA will grow tax-free. You could also invest RMD money in Health Savings Accounts (HSAs), which provide significant tax advantages.
Another alternative is to reinvest your RMD in municipal bonds, which aren't subject to federal income taxes. ETFs and mutual funds can also be more tax-efficient than actively managed funds and individual stocks.
4. Consider when you take your RMD
If you reached age 73 in 2025, your first RMD will be due on April 1, 2026. All subsequent RMDs must be taken by Dec. 31 of each year.
Keep in mind, though, that you can withdraw all or part of the RMD any time during the year. If you're planning to reinvest the money, you may want to take the RMD sooner rather than later. Individuals turning 73 this year, for example, could choose to withdraw their first RMD before year-end rather than wait until 2026 to avoid paying taxes on two RMDs in one year.
5. Reinvesting isn't always the best approach
Reinvesting RMDs is often a smart move for retirees. However, it isn't always the best approach for handling the money.
For example, if you regularly donate to charitable organizations, you can use your RMD from a traditional IRA as a qualified charitable distribution (QCD). Doing so will allow you to donate money directly to your chosen charity, excluding the donation from your taxable income. Importantly, though, the QCD transfer must be initiated directly from your IRA.
