For retirees, here's what to do with required withdrawals when you don't need the money

• For some retirees, the deadline to take required withdrawals from retirement accounts is approaching — and those who don't need the money have options.
• Since 2023, most retirees must take required minimum distributions, or RMDs, from pretax retirement accounts at age 73.
• If you have enough cash flow without RMDs, you could consider qualified charitable distributions or reinvesting the proceeds into brokerage accounts with tax-friendly assets such as exchange-traded funds.

For some retirees, the deadline to take required withdrawals from retirement accounts is approaching — and those who don't need the money have options, experts say.

Since 2023, most retirees must take required minimum distributions, or RMDs, from pretax retirement accounts starting at age 73.

April 1 after turning 73 is the first deadline, but retirees must take RMDs by Dec. 31 in subsequent years. 

The next step "always comes down to a client's personal goals, financial and tax plan," said certified financial planner Judy Brown, a principal at SC&H Group, which is headquartered in the Washington, D.C., and Baltimore metropolitan areas. She is also a certified public accountant. 

Before deciding what to do with an RMD, it's important to consider your short- and long-term priorities, including legacy goals, along with the tax impact, experts say.

Reinvest for 'future tax savings'

If you're eyeing long-term growth, you can reinvest after-tax RMD proceeds in a brokerage account and continue your current investing strategy, said Houston-based CFP Abrin Berkemeyer. 

Upon the sale of those assets, you'll get long-term capital gains rates of 0%, 15% or 20% after holding the assets for more than one year. The rate depends on taxable income.

The strategy "could lead to future tax savings" if you use the money for a large expense later, such as health care, said Berkemeyer, who is a senior financial advisor with Goodman Financial. Brokerage assets could be subject to capital gains taxes, whereas pretax retirement funds incur regular income taxes.

ETFs are 'incredibly tax efficient'

Some advisors use "in-kind transfers," which move assets directly from your pretax retirement account to a brokerage, to stay invested in the same assets. You'll still owe taxes on the distribution, but you maintain your original holdings. 

However, there are "good reasons" not to keep identical assets in a brokerage account, which incurs yearly taxes on earnings, said CFP Karen Van Voorhis, director of financial planning at Daniel J. Galli & Associates in Norwell, Massachusetts.

For example, you may want to shift holdings to exchange-traded funds because they are "incredibly tax efficient," she said.

Unlike mutual funds, most ETFs don't distribute capital gains payouts, which can save brokerage account investors on annual taxes.

Secure a 'guaranteed tax deduction'

If you're philanthropic, another option could be a so-called qualified charitable distribution, or QCD, which is a direct transfer from an individual retirement account to an eligible nonprofit organization.

For 2024, retirees age 70½ or older can donate up to $105,000, which satisfies yearly RMD requirements for those age 73 and above.

There's no charitable deduction, but QCDs don't count toward adjusted gross income, meaning retirees don't need to itemize tax breaks to claim it.

"It's effectively a guaranteed tax deduction," Van Voorhis said.

More adjusted gross income can trigger other tax issues, such as higher income-related monthly adjustment amounts, or IRMAA, for Medicare Part B and Part D premiums.