After diligently saving and investing in pretax retirement accounts throughout your working years, you will eventually reach the age where you must start taking required minimum distributions (RMDs) in retirement. While these mandatory withdrawals can be a burden for some retirees who do not necessarily need the money, they also present an opportunity to make strategic decisions to improve your portfolio.
Most retirees are required to begin taking RMDs by the age of 73, according to changes enacted by Secure 2.0. However, starting in 2033, the age for mandatory distributions will increase to 75. The annual deadline for RMDs is December 31st, and you have until April 1st of the following year after you turn 73 to take your first distribution. It is crucial to adhere to these deadlines, as failing to take the required withdrawals or taking insufficient amounts can result in a hefty penalty of 25% on the amount you should have withdrawn.
One way to utilize RMDs to your advantage is to adjust your asset allocation based on your investment goals, risk tolerance, and timeline. As market movements cause your asset mix to drift throughout the year, taking RMDs gives you an opportunity to realign your holdings to your target percentages. By selling investments from asset classes that are overweight in your portfolio, you can rebalance and stay on track with your investment strategy.
Financial experts caution against selling investments for RMDs when they are performing poorly, as this can expose you to the sequence of returns risk. Selling assets during market downturns means you may have to liquidate more investments to meet the same withdrawal amount, potentially depleting your portfolio’s growth potential. It is essential to consider the long-term impact of your selling decisions and prioritize asset preservation during market volatility.
Another aspect to consider when managing RMDs is the tax implications of your withdrawals. Funds withdrawn from pretax retirement accounts are subject to regular income taxes, while brokerage accounts incur capital gains taxes. On the other hand, Roth accounts offer tax-free growth potential. If you find yourself not needing the RMD for immediate expenses, you could reinvest the funds in a brokerage account to potentially benefit from favorable capital gains tax treatment on future asset growth.
While required minimum distributions can pose challenges for retirees, they also present opportunities for strategic portfolio management and tax planning. By carefully considering the timing of withdrawals, adjusting your asset allocation, and avoiding pitfalls like the sequence of returns risk, you can make the most of your RMDs in retirement. Consulting with a financial advisor or planner can help you develop a personalized strategy to optimize your retirement income while preserving and growing your assets for the future.