Strategic Ways to Distribute Your RMD

As life expectancies increase, more and more people want to defer withdrawals from their retirement accounts as long as possible to ensure that their nest egg will meet their retirement income needs. However, withdrawals must begin at a certain age to avoid penalties.

If you are at least 72 years old in 2021, you must withdraw the minimum distribution required (RMD) of your traditional amounts, SEPand EASY Individual Retirement Accounts (IRA). Depending on the terms of the plan, you may also need to opt out of your qualified, 403(b) or 457(b) plans.

Key points to remember

  • Certain distribution strategies, such as equalizing balances for your beneficiaries and carrying over excess amounts, can help you maximize your returns and minimize your tax burden.
  • The new age from 2021 to take the Required Minimum Distributions (RMDs) from your traditional, SEP, or SIMPLE IRAs is 72.
  • The $2 trillion emergency stimulus package suspended RMDs from retirement accounts for 2020.

Click play to learn more about Required Minimum Distributions (RMDs)

RMD suspended due to the economic crisis

On March 27, 2020, President Trump signed a $2 trillion emergency stimulus package called the CARES Act. It suspended RMDs for people aged 72 and over for 2020, giving retirement accounts more time to recover from the year’s stock market decline.

In normal years, you can apply certain strategies to withdrawals from your retirement account that will help preserve your account balance. We highlight some of these considerations here.

Strategic Means of Distribution from Designated IRAs

If you have multiple Traditional, SEP, and SIMPLE IRAs, you must calculate the RMD amounts separately, but you can aggregate and distribute the total of one or more of those IRAs.When determining the IRA from which you will distribute your RMD for the year, you may want to consider the following strategies.

Equalization of balances for your beneficiaries

If you have multiple IRAs because you want to keep separate IRAs for different beneficiaries, consider equalizing balances, which may have changed due to withdrawals, contributions, fees, and asset performance.

If you named a different person as beneficiary for each of your three IRAs, for example, and you want to leave them the same amount, you can withdraw your RMD amount from the IRA with the highest balance.

Alternatively, you can transfer amounts between IRAs to equalize balances and withdraw the applicable RMD amount from each IRA.

Eliminate underperforming assets

If you have multiple Traditional, SEP, and SIMPLE IRAs, you can eliminate deadweight assets from them either liquidate assets or by distributing them from your IRAs. Check with your financial planner to determine if there are any assets you should get rid of because they are losing money or not performing as well as other assets in your IRA portfolio.

If the plan is to dispose of these assets anyway, distributing them instead of liquidating them could prevent ticket charges (transaction fees) from being removed from your IRA balance.

However, you should exercise caution when choosing this option. If the assets lose value after being distributed from your IRA, the benefit is that you may be able to reverse the losses, which would not have been an option if the losses had occurred while the assets were in your IRA.

On the other hand, if the performance of these assets improves, you will have to pay taxes on the income. Also consider that capital gain/capital loss treatment can be applied to gains/losses, an option not available for gains/losses that occur in your IRA.

Notifying Your IRA Custodians

If you plan to pool your RMDs and distribute the total of only one of the IRAs, be sure to tell the other IRA. guardians in writing.

Most importantly, notify the IRA custodian you will be withdrawing from in a timely manner to ensure that your RMD amount is distributed before the deadline. This will help ensure that you do not owe penalties for failing to make timely RMD withdrawals.

If you combine and then receive distributions from a single IRA, be sure to notify the IRA custodians that process automatic distributions that do not require your authorization for each year’s RMD.

Strategic ways to distribute from qualified, 403(b) and 457(b) plans

If you are still working for the employer who sponsored the qualified, 403(b) or 457(b) plan in which you participate, you can defer the start of your RMD until you retire, if this option is available under plan.

To determine whether you should defer receiving RMDs from these accounts, ask your financial advisor to assess the performance of your portfolio assets and your income needs. If the assets are not performing well, it may not make financial sense to keep the amounts in your Qualifying Plan Account.

On the other hand, consider that withdrawing money from your qualifying plan will increase your taxable income for the year and potentially put you in a higher tax bracket. If you need the assets to cover your expenses, that’s no problem. However, if you already have other sources of income sufficient to meet your financial needs, it may not be wise to withdraw amounts that would continue to generate tax-deferred income if left behind. your eligible plan account.

Carryover of excess RMD amounts

If you find that you have withdrawn more than is necessary to meet your RMDs and you do not need the extra amount to cover your expenses, you can to roll the excess amount within 60 days of receipt.This will help preserve your retirement account balance and allow additional amounts to continue to generate tax-deferred income.

The essential

Withdrawing RMD from your retirement account is unavoidable, but as with most unavoidable events, timing and execution can determine the end results. Be sure to consult your financial planner about these strategies and discuss whether other options might suit your financial profile.