How to handle required withdrawals from retirement accounts

Is there a recommended strategy for getting needed withdrawals from retirement savings in this horrible market? I am a buy and hold investor. normally, I would have dropped down, not looked at my balance, and walked out of this storm. Unfortunately, the IRS is forcing me to sell stocks at the worst possible time. Any recommendations for this unprofitable project?

These questions allow me to address various issues surrounding retirement accounts and required minimum distributions, or RMDs. These withdrawals, of course, are part of the deal we make with the government when we open an IRA or similar account: We get decades (if we plan wisely) of tax-deferred growth, but we have to start tapping those savings and paying taxes on the withdrawals —when we enter our 70s.

As it happens, the timing of these questions works well: Many retirees wait until the end of the year to withdraw needed funds from IRAs and the like. And, before we get into the details, please know: the picture may not be as bleak as it seems.

A bear market does not change the size of your RMD. It’s important to start with this point: Just because the markets are down this year doesn’t mean your RMD in 2022 will also be down. (As some retirees think.)

Remember: Required withdrawals from a retirement account in a calendar year are based on the previous year’s ending account balance. So the size of your 2022 RMD is set as of December 31, 2021. This year’s slide into the markets (assuming your nest egg is invested in the markets) won’t change that.

That said, the fact that markets are down in 2022—and the fact that your current savings account balance is likely lower than it was at the end of 2021—means you’ll end up withdrawing a larger percentage of your nest egg for to cover your RMD. Yes, that sounds painful. But consider:

The IRS does not “force” you to sell stocks. First, you can use cash in your IRA—if you have it—to satisfy your RMD, says Ed Slott, an IRA specialist in Rockville Center, N.Y. Indeed, it’s a good idea to keep some cash in your retirement account just for this purpose.

Asked how they use withdrawals from traditional IRAs, surveyed retiree households said:

But let’s say all of your IRA assets are invested in the markets. You do not need to sell investments to meet your RMD. Instead, the transaction can be made “in kind”. Mr. Slott offers this example:

If your RMD is $10,000, you can transfer — and that’s the key word: transfer — $10,000 of XYZ stock from your IRA to a taxable brokerage account. This carryover counts toward your RMD. Yes, you will pay tax on the value of the stock (or equity) on the date the assets leave your IRA. And that value becomes your new “cost basis” if and when you sell the stock now in your taxable account.

Again, the point is: You haven’t “sold” anything — and certainly not at today’s low prices. You still own the assets. you just keep them out of your IRA instead of in.

(We should note here: The RMD rules apply to inherited IRAs, too.)

Is there a better/best time to do this? Hard to say. Picking the perfect time during the year to take your RMD involves timing the purchases, which is downright impossible. Therefore, it helps to consider these decisions as part of your long-term tax planning.

Let’s say you take your RMD today, in early September 2022, and (again) move the withdrawal to a non-IRA brokerage account. And let’s say the markets stage a major rally next year. You may regret, of course, that you lost the earnings, earnings that would have been sheltered within the tax-deferred IRA.

Take a deep breath. With the required withdrawal now in a non-IRA account, “buy and hold” can work in your favor, Mr. Slott says. For example, if you hold the assets for more than a year, any appreciation will be taxed favorably as long-term capital gains. In contrast, withdrawals from IRAs are taxed at ordinary income tax rates.

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And…if you hold the assets until death, there would be no tax, in most cases, on any appreciation. This is because your heirs will receive an increase in basis. Again, by contrast, IRAs don’t get a boost. when the account owner dies, the IRA beneficiary inherits the deceased owner’s basis without any adjustment.

Note: Congress suspended RMDs in 2020 due to Covid-19. this is highly unlikely to happen in 2022.

For many retirees, RMDs aren’t as big of a problem as they first seem. Yes, required withdrawals upset many. But when they’re put into perspective—when stacked against your nest egg as a whole—they begin to seem less daunting.

As you probably know, RMDs are based on IRS life expectancy tables. At age 72, when withdrawals begin, only 3.65% needs to be withdrawn, Mr. Slott notes. At age 80, the rate is still only 4.95%. At age 90, it is 8.2%.

“For most people, say, age 80 or younger, the RMD amount—at less than 5%—shouldn’t be a big deal,” he says. “And if you can keep that amount in liquid investments in your IRA, you can just use those funds for your RMDs and leave your stocks alone.”

The IRS could do you a favor. Really. Again, no one likes being forced to remove assets from their savings. But if you look at RMDs from a tax rate perspective, and you should, the required withdrawals can turn out to be a boon, at least for years to come.

“Most people taking RMDs now are withdrawing funds at historically low tax rates,” Mr. Slott says. “These funds cannot remain protected in IRAs forever. They will have to be retired at some point and fully taxed. So you can also take them out when rates are low. And that may be now for many.”

Mr. Ruffenach is a former Wall Street Journal reporter and editor. Ask Encore addresses financial issues for those thinking about, planning for, and living their retirement. Send questions and comments to askencore@wsj.com.

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