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The best way to keep required minimum distributions invested in a down market


The deadline is fast approaching for mandatory retirement plan withdrawals, which can force some retirees to sell assets in a down market. But experts say there could also be ways to cut back the negative effects.

Required minimum distributions, often called RMDs, are yearly amounts that should be taken from certain retirement accounts, similar to 401(k) plans and most individual retirement accounts.

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RMDs start whenever you turn 72, with a deadline of April 1 of the next 12 months to your first withdrawal, and a Dec. 31 due date for future years.

Even though it’s been a rough 12 months for the stock market, there is a steep IRS penalty for missing RMD deadlines — 50% of the quantity that ought to have been withdrawn.  

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“This is clearly not the opportune time to sell those assets, because they’re at a loss,” said certified financial planner John Loyd, owner at The Wealth Planner in Fort Price, Texas.  

As of mid-day Dec. 7, the S&P 500 Index is down greater than 17% for 2022, and the Bloomberg U.S. Aggregate bond index has dropped nearly 12% for the 12 months. 

Why you’ll want to manage the ‘sequence of returns’ risk

Research shows the timing of selling assets and withdrawing funds out of your portfolio may be “enormously powerful,” said Anthony Watson, a CFP and founder and president of Thrive Retirement Specialists in Dearborn, Michigan. 

The worth of assets whenever you make withdrawals may significantly shift the scale of your nest egg over time, often called the “sequence of returns” risk, and managing that risk is “the crux of retirement planning,” Watson said.

Consider ‘journaling’ to maintain your RMD invested

In the event you don’t need your RMD for immediate living expenses, there are a pair of the way to maintain the funds invested, experts say.

One option, often called “journaling,” moves the assets out of your retirement account to a brokerage account without selling. “Not lots of people know it,” Loyd said. 

Like an RMD, journaling still counts as a withdrawal for tax purposes, meaning you may receive Form 1099-R to report the transfer as income in your return, he said.

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While journaling avoids trip of the market, it’s tricky to gauge the precise dollar amount since market values fluctuate, and it’s possible you’ll need a second withdrawal to totally satisfy your RMD, he said.

Plus, most retirees withhold taxes through their RMDs, which is not possible when journaling assets, Loyd said. Typically, he uses the second withdrawal for tax withholdings.

Either way, you’ll be wanting to construct in enough time to finish each transactions by the deadline because “the IRS shouldn’t be very lenient relating to mistakes,” Loyd said.

Avoid ‘execution risk’ by selling and reinvesting

While journaling keeps assets available in the market longer, some advisors prefer to avoid “execution risk” by selling assets, withdrawing the proceeds after which reinvesting in a brokerage account.

It takes a few days for RMD funds to settle, but Watson sees journaling as “overly complicated” and prefers to reinvest the funds immediately after the withdrawal clears.

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