After funneling money into pretax retirement accounts, one will eventually encounter required minimum distributions (RMDs) during retirement. While RMDs might lead to higher taxes, they can present an opportunity to optimize your portfolio, according to experts. Certified Financial Planner Matthew Saneholtz, Chief Investment Officer and Senior Wealth Advisor at Tobias Financial Advisors in Plantation, Florida, emphasizes the significance of analyzing your holdings and deciding what to trim during this process.
Starting in 2023, most retirees are required to begin taking RMDs by the age of 73, as per Secure 2.0 regulations. This deadline is extended to the age of 75 from 2033 onwards. Although the annual RMD deadline falls on December 31st, retirees have until April 1st after turning 73 to make their initial RMD. It is crucial to note that failing to withdraw yearly RMDs or withdrawing insufficient amounts results in a hefty 25% penalty on the shortfall.
Asset allocation tends to fluctuate throughout the year due to market movements. RMDs provide an opportunity to rebalance your assets to align with your target percentages based on factors like risk tolerance, financial goals, and timeline. Certified Financial Planner Paul Winter, President of Five Seasons Financial Planning in Salt Lake City, Utah, highlights the importance of selling holdings from overweight asset classes, particularly U.S. stocks, to maintain the desired allocation.
Experts advise against liquidating investments during downturns to mitigate the sequence of returns risk, which could potentially erode your portfolio over time. Selling assets amid market volatility may result in having to sell more investments to meet the RMD requirement, leaving fewer assets to benefit from future market recoveries. It is crucial to consider the long-term implications of such actions on your portfolio’s growth potential.
Consider adjusting your “tax location” by strategically placing different types of investments in varied accounts to minimize tax liabilities. Withdrawals from pretax retirement accounts are subject to regular income taxes based on federal tax brackets, while brokerage accounts are liable to capital gains taxes. In contrast, Roth accounts offer tax-free growth. In instances where RMDs are not needed for living expenses, reinvesting the funds in a brokerage account could lead to more favorable tax treatment on future asset growth.
Navigating required minimum distributions can be an opportunity to refine your investment portfolio and enhance tax efficiency. By strategically analyzing your holdings, rebalancing assets, and considering the tax implications of different accounts, you can make the most of RMDs to optimize your financial position in retirement. It is essential to seek guidance from financial advisors to develop a personalized strategy aligned with your specific goals and circumstances.
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