Question:  

In volatile markets, what should I know regarding my IRA Required Minimum Distribution (RMD)?

Answer: 

 Let’s start with why RMDs exist; the IRS ensures that tax liabilities aren’t deferred indefinitely on funds accumulating in most retirement accounts. RMDs are withdrawal obligations determined by the IRS. 

The RMD age was increased to 73 for those born between 1951 and 1959 with SECURE Act 2.0. Initially, RMDs began at age 70.5 and increased to 72. They’ll increase again to age 75 for those born in 1960 and later. If you’re currently taking RMDs, unpredictable market conditions add a layer of intricacy. 

RMD amounts are based on life expectancy and the retirement account’s value at prior year-end. A drop in the stock market at the beginning of the year can cause concern for individuals required to withdraw funds. 

If this is your first RMD, you have the option to delay. Except for your first RMD, withdrawals must be taken by December 31 of the qualifying year. The first RMD can be delayed until April 1 of the year after you reach the RMD start age. Extra months may provide flexibility in timing, allowing market conditions to potentially stabilize or improve before taking an RMD. 

Delaying your first RMD means you’ll still need to satisfy that second year’s RMD before December 31 of the following year. This means two distributions in one year producing more taxable income. Higher income could increase certain costs, like Medicare premiums. Flexibility provides options but consider the tax implications.

If you’re still working, you may delay or defer taking the RMD from your current employer’s retirement account. The IRS generally allows your first RMD from an employer’s retirement plan such as a 401(k), 403(b) or profit-sharing plan to be taken by April 1 in the year after you retire, provided that your company allows you to delay past normal RMD age and you are not a 5% business owner of that company’s plan. As noted above, be sure to think through how taking two RMDs in the next calendar year might affect your tax situation.

Different accounts, different rules. If you hold multiple IRAs, you can withdraw the total RMD amount owed for all your IRAs from one or more of them, rather than taking each RMD from its specific account. A similar rule applies to 403(b) accounts. RMDs from other types of retirement plans like 401(k) and 457(b) plans must be taken separately from each account. Also, RMDs from beneficiary IRAs must be taken separately. Talk to your financial professional to determine where you have flexibility and where you don’t.

Use cash, if available. If you hold cash in an account you must withdraw from, take advantage of it. Instead of selling investments at reduced values, simply withdraw cash to satisfy the RMD.

Sell thoughtfully. Holding an appropriate asset allocation mix, including stocks and bonds tailored to your individual risk tolerance, allows you and your financial advisor to discuss which assets would be best to sell to satisfy the RMD amount. 

For the charitably minded, QCDs are an option. If you don’t need the income and are philanthropically inclined, you can take a qualified charitable distribution (QCD), allowing you to donate up to $100,000 to a qualified charity from your IRA and have it count toward your RMD. This strategy can help with taxes, as the gift won’t be included in your taxable income (even though it fulfills your RMD).

If you don’t need the income, consider an in-kind distribution. This involves having securities in your IRA transferred to your after-tax brokerage account. This is particularly beneficial when holding a position you don’t want to sell. You won’t avoid taxes on the RMD, but it may help during down markets if you want to hold the stock going forward. An in-kind IRA distribution will affect the cost basis of your holding.

Reinvest funds withdrawn to satisfy RMDs by moving them to an after-tax brokerage account. This may provide an opportunity for money to grow if/when markets recover. If you’re already happy with your specific holdings, however, consider the in-kind distribution strategy mentioned above.

Everyone’s situation is unique with nuanced strategies for satisfying RMDs that go beyond the approaches covered here. Your tax professional and financial advisor are the best sources for information that’s personalized to your specific situation and future goals. Stay focused and plan accordingly.