3 Things You Can’t Do With RMDs — But Most People Try Anyway

Required Minimum Distributions (RMDs) – those dreaded annual withdrawals from your retirement accounts after you turn 73 (or 75 starting in 2033) – are a constant source of confusion. While the rules have gotten slightly simpler over the years, there are still plenty of myths and misconceptions floating around.

Many people try to sidestep or manipulate their RMDs, often unintentionally, only to find themselves facing penalties from the IRS. Let’s debunk three common “can’t do” scenarios related to RMDs that people often try (and fail) to navigate.

1. Reinvest Your RMD Directly (Without Tax Implications)

This is perhaps the most common misconception. You might think, “I don’t need the money right now, so I’ll just take the RMD and immediately reinvest it into a new retirement account.” Unfortunately, that’s a surefire way to end up with a hefty tax bill.

Why It Doesn’t Work:

• RMDs are Taxable Income: RMDs are treated as ordinary income and are subject to federal and, potentially, state income taxes. When you withdraw the funds, the IRS considers them distributed for personal use.
• Limited Retirement Contribution Options: You can’t simply redeposit RMDs into another tax-advantaged retirement account, like a traditional or Roth IRA. There are contribution limits on these accounts, and RMDs don’t qualify as eligible contributions.

What You Can Do Instead:

• Pay Taxes and Invest the Remainder: After withdrawing your RMD and paying the necessary taxes, you can invest the remaining funds in a taxable brokerage account. This account won’t offer the tax advantages of a retirement account, but it will allow you to grow your wealth.
• Qualified Charitable Distribution (QCD): If you’re 70 ½ or older and itemize deductions, you can donate up to $100,000 directly from your IRA to a qualified charity. This satisfies your RMD requirement and avoids paying taxes on the distribution. This is generally a better option if you want to donate your RMD and avoid paying taxes on it.

2. Skip Your RMD (Even if You Don’t Need the Money)

The logic here is straightforward: “I’m still working and don’t need the income, so why should I take the RMD?” While understandable, skipping your RMD can be a costly mistake.

Why You Can’t Do It:

• Mandatory Distributions: The “Required” in RMD stands for something. The IRS mandates these distributions based on your age and account balance.
• Severe Penalties: Failing to take your RMD can result in a hefty penalty. The penalty is equal to 25% of the amount that should have been withdrawn but wasn’t. While the penalty used to be 50%, the SECURE 2.0 Act of 2022 lessened the penalty from 50% to 25%, with certain ways to lower the penalty to 10%.

What You Can Do Instead:

• Take the RMD and Reinvest (as described above): Even if you don’t need the money, you can still withdraw your RMD, pay the taxes, and reinvest the remainder.
• Consider Roth Conversions (Carefully): If you have traditional IRA assets, you might consider a Roth conversion strategy. This involves converting funds from your traditional IRA to a Roth IRA, paying taxes on the converted amount in the process. Roth conversions can help reduce future RMDs. However, consult a financial advisor, as these can have large tax implications and may not be optimal for your situation.

3. Use the Same Account to Satisfy Multiple RMDs

This is a subtle but important distinction. You might have several IRA accounts and assume you can just take the entire RMD from one account to satisfy the requirements for all. That’s not quite how it works.

Why It Can Be Tricky:

• Separate Calculations, Aggregated Distributions: You must calculate the RMD separately for each IRA account. However, you can aggregate the distributions, meaning you can withdraw the total RMD amount from one or more IRA accounts, as long as you satisfy the individual RMD for each account.
• No Mixing with Other retirement account Types: This aggregation rule only applies to traditional IRAs. You cannot use distributions from a 401(k) or other types of retirement accounts to satisfy your IRA RMDs.

What You Need to Remember:

• Calculate Individually, Distribute Aggregately (for IRAs): Calculate the RMD for each IRA account. Then, you can choose which account(s) to take the withdrawals from, as long as the total amount withdrawn satisfies the combined RMD for all your IRAs.
• 401(k)s Require Individual Distributions: Each 401(k) account must have its own RMD satisfied independently. You can’t use distributions from one 401(k) to satisfy the RMD of another.

The Takeaway:

Navigating RMDs can be complicated. These three common mistakes highlight the importance of understanding the rules and seeking professional advice when needed. Consult a qualified financial advisor or tax professional to ensure you’re complying with the RMD regulations and minimizing potential penalties. Staying informed will help you maximize your retirement savings and avoid costly errors.

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