When markets are down, what should you do about RMDs?

As part of an ongoing series in TowneToday, the professionals located at Towne Wealth Management are pleased to provide informative articles on a variety of wealth strategy topics. In this issue, Doug and Austin of The Bray-Harris Group encourage you to consider a few strategies when it comes to taking your Required Minimum Distribution.

Doug Bray, CIMA®, CFP®Senior Managing Partner,
Towne Wealth Management
Financial Advisor, RJFS

Austin K. Harris, Managing Partner,
Towne Wealth Management
Financial Advisor, RJFS

To ensure that tax liabilities aren’t deferred indefinitely, investors are obligated by the IRS to take required minimum distributions (RMDs) from most retirement accounts. As part of the SECURE Act 2.0, the RMD start age has increased to 73 for those born between 1951 and 1959. It will increase again to age 75 for those born in 1960 and later.

Fluctuating markets add a layer of complexity to taking these distributions. As the RMD amount is determined by the retirement account’s value at prior year-end as well as your life expectancy, a quick downturn in the stock market at the beginning of the year can cause a lot of stress for individuals who are then required to take a distribution – and who face a missed RMD penalty if they don’t.

It’s not a simple topic. However, there are a few considerations and strategies to bear in mind when thinking about your RMDs amid volatile market conditions.

If this is your first RMD, you have the option to delay. Normally, RMDs must be taken by December 31. However, your first RMD can be delayed until April 1 of the year after you reach the RMD start age. Those extra months can provide a bit of flexibility in timing, allowing for market conditions to potentially stabilize or improve before you take a withdrawal from the account in question.

However, keep in mind that if you delay your first RMD into the year after reaching your age trigger, you’ll still need to satisfy that second year’s RMD before December 31 – meaning you’ll be taking two distributions within the same calendar year. This means more taxable income, which may push you into a higher marginal tax bracket or increase certain costs, such as Medicare premiums.

Bottom line: A bit of flexibility in timing can be a positive but be sure you’ve thought through the tax implications.

If you’re still working, you may have the option to delay. If you’ve reached the age of taking RMDs but are still working, you may be able to 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.

Much like the first RMD-delay option noted above, you’ll want to think through how taking two RMDs in the next calendar year might affect your tax situation.

Different accounts have different rules. If you are the owner of multiple IRAs, you have the option to withdraw the total RMD amount owed for all of your IRAs from one or more of them, rather than taking out each RMD from its specific account. A similar rule applies to 403(b) accounts. However, RMDs from other types of retirement plans like 401(k) and 457(b) plans have to be taken separately from each account. Furthermore, RMDs from beneficiary IRAs must be taken separately.

Use cash, if available. If you’re already holding cash in an account you have to withdraw from, take advantage of it. Instead of selling investments at reduced values, simply request the cash out of the account to satisfy the RMD.

For the charitably minded, QCDs are an option. If you don’t need the income and have a cause close to your heart, you can take a qualified charitable distribution (QCD), which allows 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. Another option if you don’t need the cash flow – an “in-kind distribution.” This involves requesting that securities in your IRA be transferred to your after-tax brokerage account – which is particularly beneficial if you’re holding a position you don’t want to sell. This strategy doesn’t avoid taxes on the RMD, but it can help during down markets if you think the stock will make a comeback going forward. Bear in mind that an in-kind IRA distribution will affect the cost basis of your holding. However, you can choose to reinvest any money you withdrew to satisfy RMDs by moving it to an after-tax brokerage account.

Turn to a professional for tailored guidance. Everyone’s situation is unique, and there are nuanced strategies for satisfying RMDs that go beyond the approaches covered here. The Raymond James financial advisors at Towne Wealth Management and your tax professional are the best sources for information that’s personalized to your specific situation and future goals. Please contact any of our financial advisors with questions.

Towne Wealth Management and TowneBank are not registered broker/dealers and are independent of Raymond James Financial Services, Inc. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC, and are not insured by bank insurance, the FDIC or any other government agency, are not deposits or obligations of TowneBank, are not guaranteed by TowneBank, and are subject to risks, including the possible loss of principal. Headquarters: 5806 Harbour View Boulevard, Suite 202, Suffolk, VA 23435 (757) 638-6850.

 Please note, changes in tax laws may occur at any time and could have a substantial impact on each person’s situation. RMDs are generally subject to federal income tax and may be subject to state taxes. Raymond James and its advisors do not offer tax advice. You should discuss any tax matters with the appropriate professional. Any opinions are those of Doug Bray and Austin Harris and not necessarily those of Raymond James.