Individuals that are 72 and older this year must take required minimum distributions (RMDs) from their qualified retirement plan accounts (IRAs, 401(k)s, SEP-IRAs, Simple IRAS, and similar retirement plans but not Roth IRAs). (Please note that different rules apply to inherited IRAs and inherited Roth IRAs). The RMD amount is calculated on the account’s value at the start of the year and an actuarial factor from IRS tables.
When the financial markets are moving in a positive direction, it may make sense to defer receipt of the RMD until close to the end of the tax year to maximize account growth. For many taxpayers, especially those in their 70s—early in the RMD cycle—it is not uncommon for the total return in the retirement account to be larger than the RMD, so the account continues growing for the early years of retirement.
However, in a bear market such as we have experienced to date in 2022, the risks of such a strategy become apparent. For example, a taxpayer is 81 years old in 2022, and her IRA was worth $1 million at the beginning of the year. Her RMD distribution period from the IRS table is 19.4 years, equaling 5.15% and resulting in a $51,500 RMD for this year.
Unfortunately, the taxpayer’s IRA has shrunk by 20% this year to $800,000. After taking the RMD and paying ordinary income tax, she will be left with $748,500. Had she taken the RMD in January, she would have been better off by $10,300.
After the sharp market declines in 2009 and 2020, Congress enacted one-year waivers of the RMD rules to allow taxpayers to avoid locking in market losses in their retirement accounts. No such reprieve is expected this year.
One approach to reducing the impact of market volatility on the retirement account is to take the RMD monthly, 1/12 each month. This approach has the virtue of averaging the ups and downs and replicating a pension’s function in retirement income management.
We want you to have the peace of mind that results from comprehensive and thoughtful retirement planning. For more information about how we can work with you to create a personalized retirement plan to guide you into a secure retirement, visit our website at https://www.lptrust.com/our-services/retirement-planning/.
If you are a Legacy client and have questions, please do not hesitate to contact your Legacy advisor. If you are not a Legacy client and are interested in learning more about our approach to personalized wealth management, please contact us at 920.967.5020 or email@example.com.
© 2022 M.A. Co. All rights reserved.
This newsletter is provided for informational purposes only.
It is not intended as legal, accounting, or financial planning advice.