As you approach retirement and start facing mandatory withdrawals in the form of required minimum distributions (RMDs), it’s important to view this as an opportunity rather than a burden. These withdrawals can trigger higher taxes, but experts suggest that you can leverage RMDs to optimize your portfolio. Matthew Saneholtz, a certified financial planner, advises retirees to assess their portfolio and determine what adjustments can be made to enhance its performance.
Since 2023, retirees are required to begin taking RMDs by age 73, and this age limit is set to increase to 75 by 2033 as per the Secure 2.0 regulations. While the deadline for annual RMDs is December 31st, there’s a provision that allows you to delay your first RMD until April 1st after the year you turn 73. It’s crucial to adhere to these deadlines as failing to take the required amount can result in a hefty 25% penalty on the withdrawal amount.
Optimizing Asset Allocation
One of the key benefits of RMDs is the opportunity to rebalance your portfolio and adjust your asset allocation. By selling assets that are overweight in your portfolio, you can realign your investments based on your risk tolerance, goals, and timeline. Paul Winter, a certified financial planner, emphasizes the importance of having a target asset allocation for each client and making adjustments as needed to maintain the desired balance.
Avoiding Sequence of Returns Risk
When selling assets to meet RMD requirements, it’s advisable to avoid liquidating investments that are experiencing a downturn. This precaution is essential to mitigate the sequence of returns risk, which could potentially shrink your portfolio over time. Selling assets during market downturns can lead to selling more investments to meet the RMD, leaving fewer opportunities for future growth when the market recovers.
In addition to optimizing asset allocation, RMDs offer a chance to adjust your tax strategy by considering the types of investments in different accounts. Withdrawals from pretax retirement accounts are subject to income taxes, whereas brokerage accounts are liable for capital gains taxes. On the other hand, Roth accounts provide tax-free growth. By reinvesting RMD funds in a brokerage account, you can potentially benefit from more favorable capital gains tax treatment in the future, even though it might not result in immediate tax savings.
While RMDs may seem like an obligation, they can actually serve as a valuable tool for enhancing your portfolio and optimizing your tax strategy in retirement. By carefully planning and strategizing how to utilize these required withdrawals, you can make the most of this opportunity to secure your financial future.