After funneling money into pretax retirement accounts, retirees will eventually face mandatory withdrawals in retirement known as required minimum distributions, or RMDs. While RMDs can trigger higher taxes, they can also offer an opportunity to optimize your investment portfolio, according to experts.
Certified financial planner Matthew Saneholtz, chief investment officer and senior wealth advisor at Tobias Financial Advisors in Plantation, Florida, suggests using RMDs as a chance to review your portfolio and make necessary adjustments. By analyzing what holdings to trim, retirees can reallocate their assets based on risk tolerance, goals, and timeline.
Starting in 2023, most retirees are required to begin taking RMDs by age 73, which will increase to age 75 by 2033 due to changes enacted by Secure 2.0. While the annual RMD deadline is December 31st, retirees have until April 1st after the year they turn 73 to take their first RMD. Failure to comply with RMD requirements can result in a 25% penalty on the amount that should have been withdrawn.
One of the significant benefits of RMDs is the ability to adjust your asset allocation back to your intended percentages. By selling holdings that exceed your target asset allocation, you can rebalance your portfolio accordingly. This allows you to maintain a diversified investment mix based on your financial goals.
Experts advise retirees to be cautious when selling investments to satisfy RMD requirements. Selling investments when their value is down could lead to the sequence of returns risk, which may negatively impact your portfolio over time. By strategically planning which assets to liquidate, you can minimize the risk of depleting your investments during market downturns.
In addition to portfolio management, RMDs can also be used to optimize your tax situation. Withdrawals from pretax retirement accounts are subject to regular income taxes, while brokerage accounts incur capital gains taxes. On the other hand, Roth accounts offer tax-free growth. Retirees can strategically reallocate funds to minimize tax liabilities in the future while reinvesting excess RMDs in brokerage accounts for potential capital gains tax advantages.
Required minimum distributions in retirement can be more than just a financial obligation – they can be valuable tools for enhancing your investment portfolio. By leveraging RMDs to rebalance your assets, mitigate risks, and optimize tax efficiency, retirees can ensure that their retirement savings continue to support their financial goals effectively.