After funneling money into pretax retirement accounts, retirees will eventually face mandatory withdrawals in retirement known as required minimum distributions, or RMDs. These withdrawals can trigger higher taxes and pose a challenge for retirees who may not necessarily need the money. However, experts suggest that RMDs present an opportunity to optimize and enhance your portfolio.
Certified financial planner Matthew Saneholtz, chief investment officer and senior wealth advisor at Tobias Financial Advisors, recommends looking at your portfolio strategically when planning for RMDs. He advises assessing your holdings and deciding which assets to trim or reallocate. By reassessing your asset allocation, you can ensure that your investments align with your risk tolerance, goals, and timeline.
Most retirees are required to begin taking RMDs by age 73, with changes enacted by Secure 2.0 pushing the age to 75 starting in 2033. While the annual RMD deadline is Dec. 31, retirees have until April 1 after the year they turn 73 to make their first withdrawal. It is important to note that failing to take RMDs or withdrawing less than the required amount can result in a 25% penalty on the shortfall.
One effective strategy for utilizing RMDs is to rebalance your portfolio to maintain your target asset allocation. By selling assets in asset classes where you are overweight, you can bring your portfolio back in line with your intended percentages. This approach allows you to capitalize on market movements and adjust your investment mix accordingly.
Financial experts advise against selling investments at a loss to fund RMDs, as this can expose your portfolio to the sequence of returns risk. Selling investments during market downturns may result in depleting your portfolio without leaving room for growth when the market recovers. Instead, consider adjusting your “tax location” by strategically withdrawing funds from different types of accounts to minimize tax implications.
If you do not immediately need the funds from RMDs, consider reinvesting them in a brokerage account to capitalize on future growth opportunities. While this may not reduce your current-year taxes, reinvesting RMDs can lead to more favorable capital gains tax treatment in the long run. By strategically reinvesting your RMDs, you can enhance the overall growth potential of your portfolio.
Required minimum distributions offer retirees a unique opportunity to optimize their portfolios and maximize growth potential. By carefully assessing your asset allocation, managing risk, and strategically reinvesting RMDs, you can make the most of this mandatory retirement withdrawal process to secure a financially stable future.