I will be 73 in 2024. I have a traditional individual retirement account (IRA). Most of the money is tied up in stocks, and stocks have fallen sharply this year. If I sell to pay the required minimum distributions (RMDs), I will have to sell at a huge loss. How do I avoid that loss and pay for RMDs? Any strategies?
-Vinod
For some retirees, required minimum distributions are not relevant because the retirees must withdraw the money anyway to cover expenses. So the fact that they have to do this is pretty much undisputed.
For others, including you, RMDs can become a real sticking point. They limit your control over your benefit schedule, tax management, investment strategy and estate plan.
If you have questions specific to retirement withdrawal strategies, a financial advisor can help.
Bear markets and selling at a loss
Your specific problem is not difficult to understand. The specific stocks you own may have fallen.
One of the fundamental behavioral principles of successful long-term investing is to avoid panic selling in situations like these. If you do, you may miss out on potential future growth and simply compound your losses. Holding on for the long term is probably a better choice.
In your case, it sounds like you have that emotional response under control, but feel backed into a corner by your RMD.
Timing of your first required minimum distribution
As the name suggests, your RMD is required. You can’t just skip it. Otherwise, the IRS will fine you 50% of the amount you should have taken but didn’t. That’s steep, so let’s definitely avoid that.
However, since this will be your first required minimum distribution, you have a little leeway when it comes to when you take it.
As things stand now, you’re responsible for an RMD since you’re 73 or older, thanks to the Setting Every Community Up for Retirement Enhancement (SECURE) Act. But you have until April 1 of the year following the year of your first required minimum distribution to physically withdraw the money from your account. For you, this means that you can postpone the payment until April 1, 2025.
Waiting until then to complete your first withdrawal may give you plenty of time to recoup your losses. But there is no guarantee. Your stocks may recover during that time, or they may fall even further, making your problem worse. It is an option you have after all. Consider speaking to a financial advisor who can offer you more specific insights based on your circumstances and goals.
Benefits and their tax consequences
Also remember that delaying your first RMD until April 1 of the following year does not alleviate the requirement to take an RMD for that year as well. You must take each subsequent RMD after your first by December 31 of the applicable year, so you will need to take two RMDs that year if you decide to defer. In other words, if you withdraw your 2024 RMD on April 1, 2025, you must still withdraw the 2025 RMD by December 31, 2025.
This may be a good choice for you, but you’ll want to know how it affects your overall tax situation since you’ll need to include both benefits in your income. Consider matching with a financial advisor to create an appropriate RMD and tax strategy for your goals.
Benefits in kind
If capturing your investment losses is a primary consideration for you and you don’t necessarily need the money from the RMD, in-kind distributions may be something to consider.
The normal treatment when dealing with RMDs is to sell the necessary amount of investments to raise enough cash to cover the RMD, and then distribute the money. For example, if you need to withdraw $50,000 to meet your RMD for the year, you can sell shares currently valued at $50,000 and then withdraw the $50,000 in cash.
Of course, that’s the problem, right? Stocks currently valued at $50,000 may have been worth more than $60,000 at the beginning of the year. If you sell now, the investment will not have a chance to recover.
Distribution in kind can provide a solution. Distributing assets “in kind” simply means that you transfer or withdraw the actual asset, rather than first selling and withdrawing cash.
This means you meet the RMD requirement, but you can continue to hold the investments. The current value of the benefit is still taxable, which is really the whole point of mandating mandatory distributions, so make sure you:
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Make sure you already have enough cash on hand to pay the tax bill.
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Sell some of the shares you distribute to cover this.
If you withdraw shares in kind to satisfy your RMD, you must transfer them to a taxable brokerage account. A financial advisor can help you with the process and determine an appropriate investment strategy.
You can’t have them transferred to another tax-deferred account and you can’t use a Roth conversion. But you can then keep the investment in a taxable account for as long as you want. You’ll have to pay taxes on future dividends and realized capital gains, but that may be better than holding onto your losses.
In short
You’re on track to be responsible for an RMD by 2023. But you have until April 1 of the year following the year of your first required minimum distribution to actually withdraw the money from your account. An in-kind distribution can provide a solution to retaining losses when taking RMDs.
Brandon Renfro, CFP®, is a financial planning columnist at SmartAsset, answering reader questions about personal finance and tax topics. Do you have a question that you would like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Brandon is not a participant in the SmartAsset AMP platform, nor an employee of SmartAsset, and has received compensation for this article.
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The post Ask an Advisor: How Do I Avoid Losses When Taking RMDs? I’ll be 72 years old soon and my stocks are ‘way down’ This year first appeared on SmartAsset Blog.
