I will be 72 on February 10, 2023. I have a Traditional Individual Retirement Account (IRA). Most of my money is tied up in stocks, and stocks have fallen significantly this year. If I sell to pay required minimum distributions (RMDs), I will have to sell at a huge loss. How do I avoid that loss and pay for RMDs? Are there any strategies?
-Vinod
For some retirees, required minimum distributions are irrelevant because retirees have to take the money anyway to cover expenses. So the fact that they are required to do so is virtually irrelevant.
For others, including you, RMDs can be a real stumbling block. They limit your control over your distribution schedule, tax management, investment strategy, and estate plan.
If you have specific questions about retirement withdrawal strategies, a financial advisor can help.
Bear markets and selling at a loss
Your specific problem is not hard to see. The S&P 500 is down about 17% in late November. The specific stocks you own may be down even more.
One of the basic principles of successful long-term investing is to avoid panic selling in these situations. If you do, you may miss out on potential future growth and simply consolidate your losses. Holding on for the long term is probably a better choice.
In your case, it seems like you have the emotional response under control, but you feel cornered by your RMD.
The 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 hit you with a penalty equal to 50% of the amount you should have taken but didn’t. That’s a hefty penalty, so let’s definitely avoid it.
Since this is your first mandatory minimum benefit, you still have some leeway regarding when you receive this benefit.
As it stands now, you’re responsible for an RMD for 2023—the year you turn 72—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, that would mean you could delay the distribution until April 1, 2024. That’s about a year and a half from now.
Waiting until then to complete your initial withdrawal may give you enough time to recover your losses. But there’s no guarantee. Your stocks could recover in that time, or they could fall even further, making your problem worse. It’s an option you have, though. Consider talking to a financial advisor who can provide more specific insights based on your circumstances and goals.
Benefits and their tax consequences
Also keep in mind that delaying your first RMD until April 1 of the following year does not eliminate the requirement to take an RMD for that year as well. You must take each subsequent RMD after your first by December 31 of that year, so you would need to take two RMDs that year if you decide to delay. In other words, if you take your 2023 RMD on April 1, 2024, you would still need to take your 2024 RMD by December 31, 2024.
This may be a good choice for you, but you will want to know what impact this will have on your overall tax position, as you will need to include both benefits in your income.
Benefits in kind
If your primary concern is capturing your investment losses and you don’t necessarily need the RMD money, then in-kind distributions may be something to consider.
The normal procedure for handling RMDs is to sell the necessary amount of investments to raise enough money 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 could sell stocks that are currently worth $50,000, and then withdraw the $50,000 in cash.
That’s the problem, isn’t it? A stock that’s worth $50,000 today might have been worth more than $60,000 at the beginning of the year. If you sell now, the investment doesn’t have a chance to recover.
An in-kind distribution can provide a workaround. Distributing assets “in-kind” simply means that you transfer or withdraw the actual assets, rather than selling them first and withdrawing cash.
This satisfies the RMD requirement, but allows you to continue holding the investments. The current value of the distribution is still taxable, which is kind of the point of requiring mandatory distributions in the first place, so make sure you:
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Make sure you have enough cash on hand to pay the tax.
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Sell some of the shares you distribute to cover the risk.
If you withdraw shares in kind to fulfill your RMD, you must transfer them to a taxable securities account. A financial advisor can help you with the process and determine an appropriate investment strategy.
You can’t roll them over to another tax-free account, and you can’t use a Roth conversion. But you can hold the investment in a taxable account for as long as you like. You’ll have to pay taxes on future dividends and realized capital gains, but that may be better than locking in your losses.
Conclusion
You’re on track to be responsible for an RMD for 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 temporary workaround against locking in losses when taking RMDs.
Brandon Renfro, CFP®, is a SmartAsset financial planning columnist who answers readers’ questions about personal finance and tax topics. Have a question you’d 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 is he an employee of SmartAsset. He received compensation for this article.
Find a financial advisor
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Planning for retirement? Use SmartAsset’s Social Security calculator to get an idea of what your benefits could look like after you retire.
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The post Ask an Advisor: How Do I Avoid Locking in Losses When Taking RMDs? I’m Turning 72 Soon and My Stocks Are ‘Down a Lot’ This Year appeared first on SmartAsset Blog.
