When markets are down, what options do you have for RMDs?
As an investor, you’re obligated by the IRS to take required minimum distributions (RMDs) from most retirement accounts to avoid indefinitely deferring tax liabilities. But, if timing isn’t favorable, a quick market downturn at the start of the year can make taking RMDs stressful.
Explore some of the strategies you can deploy when considering RMDs amid turbulent market conditions, and speak to your financial advisor for more information.
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.
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 has to 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 financial 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 sell investments at reduced values. Alternatively, discuss with your financial advisor which assets, including stocks and bonds, make most sense to sell to satisfy the RMD.
5. 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). 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.
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. 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, which means no one RMD strategy amid volatility will work for all. Think through each with the help of a knowledgeable advisor and your tax professional.
RMDs are generally subject to federal income tax and may be subject to state taxes. Raymond James does not provide tax advice. Please discuss these matters with your tax professional.
Sources: raymondjames.com/commentary-and-insights; IRS RMD FAQ