Reducing the Pain From Required Retirement Withdrawals This Year

Millions of retirees will receive friendly reminders from their banks and brokers in the coming weeks to make the necessary withdrawals from their 401(k)s or other retirement accounts by the end of the year.

The annual ritual could feel particularly painful this time, as the S&P 500 is down nearly 25% for the year through September. Many retirees have to withdraw a larger percentage of their nest egg and pay taxes than they might prefer, as the formula used to calculate the required minimum payout, or RMD, is based on the account balance at the end of last December – before markets plummeted.

A typical, balanced individual retirement account could be down 15% year-to-date, says Donald W. Cash, a chartered accountant in Red Bank, NJ, for an 80-year-old taxpayer with a $1 million account at the end of 2021 a 15% drop and a required payout of $50,000 would reduce his account balance to $800,000.

Congress waived RMDs after the market’s sharp declines in 2009 and 2020, but retirees shouldn’t expect a similar pass this year, according to tax experts. Under state rules for retirement savings accounts, which offer years of tax-deferred growth, in most cases individuals must begin accessing the savings at age 72 and pay taxes on those distributions.

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RMDs apply to traditional pre-tax individual retirement accounts, SEP IRAs, Simple IRAs, 401(k)s, and similar plans. Statistics from the Internal Revenue Service show that 12.6 million taxpayers over the age of 70 had $3.4 trillion in traditional individual retirement accounts in 2019.

Inherited IRAs, whether pre-tax or Roth, also have required distributions, but with different rules, including a new 10-year distribution period for many heirs to accounts whose owners died after 2019.

The required withdrawals in falling markets are frustrating for retirement account holders who are reluctant to continue reducing their balances and forgo growth. But there are some strategies to mitigate the impact, say tax and financial advisors.

Build a volatility buffer

Warner Williams, a 73-year-old retired electrical engineer in Bowling Green, Kentucky, happily takes his required distribution, which will be $35,000 for 2022, at the end of the year and is pleased that his individual retirement account balance is up year-to-date 4% down.

Mr. Williams uses his required annual withdrawals to fund life insurance for his daughter, which he and his wife could access for long-term care if needed.

“We’re safe,” says Mr. Williams. “We’re not so much concerned with profit as with subsistence.”

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His adviser, Allen Costellow, a registered financial adviser at Bowling Green, positioned Mr. Williams’ portfolio with a number of investments that are not subject to market volatility, including real estate investments that are not traded and act as a buffer.

“We pull RMD out of income-generating assets, not market-based money,” says Mr. Costellow.

Because Mr. Williams and his wife, Cathy, live on income from his pension and Social Security, they use IRA withdrawals to fund life insurance to pass on to their daughter — or to access if they need long-term care.

“We’re just trying to minimize our tax burden and give our daughter the opportunity to inherit tax-free,” says Mr. Williams.

Mr. Williams’ portfolio includes non-traded real estate investments as a volatility buffer.

Under Mr. Costellow’s guidance, Mr. Williams also performed a series of Roth conversions to lower the account balance. By converting a traditional IRA to a Roth IRA, you pay taxes on the conversion, and then the Roth IRA money grows tax-free and can be withdrawn tax-free.

Set up monthly payouts

IRA owners can set up monthly or quarterly distributions from their accounts, with the distributions going directly to a brokerage or checking account.

“While the blow still hurts, if markets continue to slide, it’s a little less dire than taking the entire payout today or in December,” says Mr. Cash. He likens it to the inverse of the dollar-cost average, the concept of buying into markets on a planned schedule rather than trying to time them.

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Get payouts “in shape”

Payment does not have to be made in cash. T. Reid Bolinger, 54, a certified financial planner in Burlington, NC who inherited an IRA from his teacher mother in 2011, works and doesn’t need the payouts to survive.

Instead of selling struggling tech stocks in his account and redistributing the money, he transferred the stocks directly to a taxable brokerage account that he hopes will recover.

“They don’t time the market,” he says. Tax is still due on the distribution.

Donate your retirement dollars

Taxpayers who are 70½ years of age or older this year and are already planning to give to charity can make donations directly to an IRA at tax time.

The tax arrangement, known as a qualified charitable distribution, helps taxpayers, particularly those who don’t report deductions, receive a tax break for donations of up to $100,000 per year. Charitable distribution counts towards RMD but does not count as income.

In June, Stephen Dellelo, a 72-year-old licensed financial advisor in South Easton, Mass., faced his first required minimum distribution and didn’t want to pay taxes on money he didn’t need. So he donated $4,000 of it to his church, Holy Cross Parish.

Stephen Dellelo donated a portion of his required minimum distribution to his church.


Photo:

Richard Powers

Withdraw money at low tax rates

Lou Barberini, a CPA in San Francisco, sees the downturn as an opportunity to move more money out of pre-tax retirement accounts to today’s low values ​​and historically lower tax rates that will rise in 2026.

“Everyone wants to wait for a recovery to withdraw money,” he says. “Either the pensioner or his heirs will one day have to pay the tax. Why not capitalize on this declining market and take it to a lower tax bracket now?”

In some cases, it’s up to taxpayers to expedite the payouts and actually take more than the amount required, just enough to avoid jumping up the tax bracket.

One client, a divorced woman who wanted money to help her daughter with a down payment, doubled the monthly amount she took out to $10,000, bringing her total income to $170,000 and in tax bracket of 24 % remained. The higher income means a year-long increase in Medicare surcharges, but keeps more money out of higher tax brackets in the long run.

Write to Ashlea Ebeling at [email protected]

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