When it comes to retirement planning, one aspect that often gets overlooked is the concept of required minimum distributions (RMDs). After funneling money into pretax retirement accounts, retirees will eventually face mandatory withdrawals known as RMDs. While these withdrawals can be a nuisance for retirees who do not necessarily need the money, they can also present an opportunity to improve your portfolio.
Certified financial planner Matthew Saneholtz suggests taking a closer look at your portfolio when considering RMDs. He advises retirees to assess their holdings and decide what assets they may want to trim. This can be a strategic way to rebalance your portfolio and ensure that it aligns with your financial goals and risk tolerance.
As of 2023, most retirees are required to begin taking RMDs by age 73, with that age increasing to 75 starting in 2033. The deadline for annual RMDs is typically December 31st, but retirees have until April 1 after the year they turn 73 to make their first withdrawal. Failing to take RMDs or withdrawing an insufficient amount can result in a 25% penalty on the amount that should have been withdrawn.
One way to utilize RMDs effectively is by adjusting your asset allocation. Market fluctuations can cause your investment mix to drift from your intended percentages. By selling holdings that are overweight in your portfolio, you can use RMDs to rebalance and realign your investments with your financial objectives.
Minimizing Taxes and Maximizing Growth
When deciding which assets to sell for RMDs, it is important to consider the tax implications. Selling investments when they are down can expose you to the risk of diminishing returns over time. By strategically planning your withdrawals and tax location, you can minimize future tax liabilities and capitalize on potential growth opportunities.
Withdrawals from pretax retirement accounts are subject to regular income taxes based on your federal bracket, while brokerage accounts are subject to capital gains taxes. On the other hand, Roth accounts generally grow tax-free. For retirees who do not need the RMD funds for immediate expenses, reinvesting them in a brokerage account can yield future tax advantages and potential capital gains.
Required minimum distributions are an integral part of retirement planning that should not be overlooked. Instead of viewing RMDs as a burden, retirees can use them as a strategic tool to optimize their portfolios, manage asset allocation, minimize taxes, and maximize growth opportunities. By carefully considering how RMDs fit into their overall financial strategy, retirees can set themselves up for long-term financial success and security in retirement.