In retirement, one of the unavoidable financial obligations that come with funnelling money into pretax retirement accounts is required minimum distributions (RMDs). These mandatory withdrawals can be a nuisance for retirees who do not necessarily need the money, as they can trigger higher taxes. However, financial experts suggest that although RMDs may seem like an inconvenience, they present an opportunity to strategically improve your portfolio. Certified financial planner Matthew Saneholtz, Chief Investment Officer and Senior Wealth Advisor at Tobias Financial Advisors in Plantation, Florida, emphasizes the importance of assessing your portfolio and determining what assets to trim to align with your financial goals.
As per changes enacted by Secure 2.0, retirees are required to begin taking RMDs by age 73, which will later be increased to age 75 starting in 2033. While the annual RMD deadline is December 31st, retirees have the option to take their first RMD by April 1st after turning 73. It is crucial to note that failing to take the yearly RMDs or withdrawing insufficient amounts can result in a steep penalty of 25% on the overlooked withdrawal. This penalty underscores the importance of adhering to RMD regulations to avoid unnecessary financial setbacks in retirement.
Asset Allocation Adjustment
Your asset allocation within your investment portfolio may fluctuate throughout the year due to market movements. RMDs provide retirees with the opportunity to realign their assets to meet their intended percentages based on factors such as risk tolerance, investment goals, and timeline. By evaluating your asset allocation, you can strategically sell assets that are overweight in your portfolio, ensuring that your investments remain in line with your financial objectives. Paul Winter, President of Five Seasons Financial Planning in Salt Lake City, Utah, highlights the significance of maintaining a target asset allocation to guide your investment decisions and optimize portfolio performance.
Minimizing Sequence of Returns Risk
Financial experts caution against selling investments during market downturns to avoid the sequence of returns risk, which could potentially diminish your portfolio value over time. Withdrawing assets during market downturns to meet RMD requirements can result in selling more investments at lower prices, limiting future growth potential when the market eventually recovers. By strategically planning asset sales and navigating market fluctuations, retirees can mitigate the impact of the sequence of returns risk on their investment portfolios.
Another crucial aspect of RMD planning is optimizing your tax liabilities by adjusting your “tax location.” Different types of investments in various accounts are subject to different tax treatments, such as regular income taxes for pretax retirement accounts and capital gains taxes for brokerage accounts. Roth accounts provide tax-free growth opportunities for retirees. If the RMD funds are not immediately needed, retirees may consider reinvesting them in a brokerage account to capitalize on future asset growth with potentially more favorable tax treatments. While this strategy may not yield immediate tax benefits, it can pave the way for long-term tax optimization and financial growth opportunities in retirement.
Required minimum distributions present retirees with a unique opportunity to strategically manage their portfolios, optimize their asset allocation, and minimize tax implications. By taking a proactive approach to RMD planning and leveraging these mandatory withdrawals to their advantage, retirees can navigate the complexities of retirement planning with confidence and financial security.