The former Leicester captain was purchased to help fill a part of the huge void left by Graeme Souness' move to Italy. MacDonald managed to get a run in the side midway through the 1985/86 double season but a broken arm in a match against Spurs kept him out for a while. Steve McMahon's injury allowed MacDonald back into the side and his excellent form won him a place in the first 11 for the FA Cup final ahead of Steve, who had recovered. MacDonald was Liverpool's unsung hero on the day. "Headlines were being prepared in salute of Rushie and Jan. In the dressing room we all rushed to congratulate Kevin MacDonald," Dalglish said. "He got in among Everton's midfield, taking the fight to Reidy, reclaiming the ball time after time. Never one of the most celebrated footballers, Kevin Mac will always be remembered fondly for the turning the Blue Tide back at Wembley in May 1986." While MacDonald's qualities were certainly appreciated by his boss he did have one drawback according to King Kenny: "'Albert' grumbled about everything from the pitch to the weather and the food. He even moaned about other people moaning!" Disaster struck on 20 September 1986 against Southampton when shortly after coming on as a substitute MacDonald suffered a double leg fracture. He returned to action 15 months later when he was loaned out to his former club, Leicester. He played a few games with Liverpool in 1988/89 before going on another loan spell in Glasgow with Rangers. MacDonald was out of the first-team picture at Liverpool due to his lengthy lay-off and signed for Coventry City where he played 44 games in two seasons. He finished his career in the Fourth Division with Walsall.

MacDonald joined Leicester's coaching staff and was even caretaker manager for four games in late 1994 after Brian Little and Allan Evans quit the Foxes for Villa Park. When Steve Staunton took over as Ireland's manager in January 2006 he appointed MacDonald as his senior coach, albeit on a part-time basis, combining the role with his coaching job at Aston Villa. His contract was terminated along with Staunton's in October 2007. Following the resignation of Martin O'Neill as Aston Villa manager five days before the 2010/11 Premier League season was due to start, MacDonald was immediately named as caretaker manager of the West Midlands club before Gérard Houllier took over. MacDonald left Villa in June 2012 after being 17 years on the backroom staff, having overseen a steady flow of academy prospects achieving success in the first team.

On 28 February 2013 MacDonald was appointed to succeed Paulo Di Canio as the manager of League One Swindon Town. He steered Swindon to the last of the four play-off positions but they lost to Brentford on penalties after two drawn matches in the semi-final. Two months after that defeat MacDonald left the Wiltshire club by mutual consent.

MacDonald returned to Villa Park in February 2015 as assistant manager to Tim Sherwood.