After funneling money into pretax retirement accounts, you will eventually face mandatory withdrawals in retirement known as required minimum distributions, or RMDs. Since RMDs can trigger higher taxes, the withdrawals can be a nuisance for some retirees who do not need the money. However, experts suggest that this yearly activity could offer a chance to improve your portfolio. Certified financial planner Matthew Saneholtz, chief investment officer and senior wealth advisor at Tobias Financial Advisors, highlights the importance of taking a closer look at your portfolio and determining what adjustments need to be made. This could involve trimming certain assets to align with your overall investment objectives, risk tolerance, and financial goals.
As of 2023, most retirees are required to begin RMDs by the age of 73, following changes implemented by Secure 2.0. This age threshold is slated to increase to 75 starting in 2033. While the annual RMD deadline falls on December 31st, individuals have until April 1st of the following year after turning 73 to make their first mandatory withdrawal. Failure to comply with RMD regulations by skipping withdrawals or taking below the required amount can result in a 25% penalty on the shortfall. It is essential for retirees to familiarize themselves with these regulations and ensure timely and accurate RMDs to avoid potential penalties.
Your asset allocation can fluctuate throughout the year due to market movements. RMDs provide an opportunity to readjust your investment mix to align with your target asset allocation. By selling assets that are overweight in your portfolio, you can rebalance your investments to reflect your desired percentages. Paul Winter, president of Five Seasons Financial Planning, emphasizes the importance of maintaining a target asset allocation and selling holdings in asset classes that exceed the desired allocation. This proactive approach can help mitigate risks and optimize your investment portfolio for long-term growth.
Minimizing Tax Implications
In addition to rebalancing your portfolio, RMDs can also be used to optimize your tax situation. Withdrawals from pretax retirement accounts are subject to regular income taxes based on your federal tax bracket, while brokerage accounts incur capital gains taxes. On the other hand, Roth accounts provide tax-free growth opportunities. Financial expert Matthew Saneholtz suggests adjusting your “tax location” by strategically allocating investments in different accounts to minimize tax liabilities in the future. If you do not require the RMD funds for immediate expenses, consider reinvesting them in a brokerage account for potential future growth with more favorable capital gains tax treatment.
Required minimum distributions in retirement offer a valuable opportunity to reevaluate and enhance your investment portfolio. By leveraging RMDs for rebalancing, compliance with retirement regulations, and tax optimization, retirees can navigate the complexities of retirement planning with confidence and strategic foresight. It is crucial to seek guidance from financial professionals to maximize the benefits of RMDs and achieve long-term financial stability in retirement.
Leave a Reply