Question:  

With financial markets being down, are there any options available for taking my IRA required minimum distributions that might take advantage of the situation?

Answer: 

By this time of the year, most people have completed their retirement plan required minimum distributions (RMDs) for 2022 and are beginning to think about the most efficient way to satisfy this requirement for 2023. As an investor, the Internal Revenue Service (IRS) monitors retirement account owners who are obligated to take RMDs from most retirement accounts. This is necessary to avoid indefinitely deferring tax liabilities. But, if the timing isn’t favorable, market downturns can make taking RMDs stressful. Distribution amounts are based on the value of the account on December 31st of the year prior to the distribution.

Let’s explore a few of the strategies you may be able to implement when considering RMDs during choppy market conditions.

Seven Strategies:

1. If this is your first RMD, you can delay. Usually, RMDs must be taken by December 31; however, your first RMD can be delayed until April 1 the following year. Flexibility around timing may be favorable if market conditions improve before you withdraw, but it’s also crucial to think through any tax implications of delaying and the consequences of receiving a larger amount of taxable income later. 

2. If you’re still working, you might be able to delay. After you’ve reached the relevant RMD age, you may have the option to defer taking the RMD from your current employer’s retirement account. The IRS typically allows your first RMD from a current employer’s retirement plan to be taken by April 1 the year after you retire, however a company retirement plan must allow for this exception, so check with the plan administrator.

3. Different types of accounts have different rules of play. Withdrawing from one or more IRAs works differently than 401(k) plans. Your tax advisor can help you identify where you have flexibility to withdraw and where you don’t.

4. If available, use cash. Otherwise, sell with purpose. To satisfy the RMD, simply request cash out of your account rather than selling investments at reduced values. Alternatively, discuss with your financial advisor which assets, including stocks and bonds, make the most sense to sell to satisfy the RMD.

5. Qualified Charitable Distributions (QCDs) are an option if you have charitable intentions. If you have a cause close to your heart, you can make a qualified charitable distribution (QCD) directly to that organization. This approach allows you to donate up to $100,000 to charity from your IRA and have it count toward your RMD, which should help come tax time. Your financial advisor can help you with this concept. 

6. If income isn’t the priority, you can consider an in-kind distribution. Like QCDs, an in-kind distribution is another option if you don’t require cash flow. An in-kind distribution is one where specific securities are identified and moved from the retirement account to the appropriate recipient. While this strategy doesn’t avoid taxes, it can help reduce transaction costs by transferring securities in your IRA to your after-tax brokerage account. Bear in mind that an in-kind IRA distribution will reset the cost basis of your holding.

7. Reinvest. Reinvesting your RMD into an after-tax brokerage account could be advantageous when the markets eventually start to recover.

Everyone’s situation is unique, meaning that there is not a “one size fits all” RMD strategy, especially during times of volatility that will work for everyone. Your CERTIFIED FINANCIAL PLANNING™ professional can help you think through each option along with the help of your tax professional. Stay focused and plan accordingly.