RMD's - They Don't Have To Work Against You

Required Minimum Distributions (RMD's) are often resented because they are seen as "forcing" you
to sell securities from 401k/IRA savings and creating  unwanted tax liability on the distribution.
Perhaps a little planning and a different perspective might help.

It is true that starting at age 72 you are required to take a distribution from a Traditional 401k/IRA
or from a Roth 401k (RMD's are not required for Roth IRA's). However, there are three things to keep in
mind that may make this transaction more palatable:

• You know in advance how much the distribution will be.
• There is no requirement that any securities need to be sold.
• The amount withdrawn may be immediately, or even simultaneously, re-invested.

The I.R.S. uses a set divisor schedule to determine the percent of savings that must be withdrawn at a certain age.
At age 72 you will be required to withdraw ~3.65% from applicable 401k/IRA savings. If you have multiple accounts
this can be taken all from one account, or you can take any amount from any account as long as the total equals the required % of savings. For example, if you have $1M in retirement savings, at age 72 your total RMD amount would
be ~$36,500. For those that need to use their retirement savings to help pay expenses, this is a "reasonable" amount.
If you need to withdraw more than this, the RMD is a moot point, but if not, it is well within the range of 3% to 5% that most advisers recommend as a desirable annual withdrawal amount that will allow your savings to last 25-30 years.

The RMD % does rise as you get older, but keep in mind that your savings would be decreasing at the same time
due to previous withdrawals. At age 75 you will need to withdraw 4.07% of your savings, but by then your balance
would be ~$854,600, so the withdrawal amount will be ~$36,200, or almost the same as it was at age 72. At age 85, the RMD % will be 6.25%, or ~ $33,675, and you would still have ~$500,000, or half of your original $1M balance.
Not too bad.

But wait, most likely you would have your savings invested and it would be earning returns. The average RMD withdrawal % from age 72 to age 85 is ~4.75%. If your savings also earned ~4.75% (reasonable) you would still have ~$950,000 at age 85.  Earning a conservative 3% return, you would have ~$755,000. RMD's by themselves will not cause you to run out of savings.

RMD amounts are based on the account balance as of the prior year. Since you also know what the required withdrawal % will be each year (the divisors can change over time, but not by much), a little planning may improve the situation. What if you kept the amount that you needed for the RMD in cash, rather than as an investment that you have to sell?
If you stay fully invested, and have to sell securities to satisfy the RMD, you never quite know if you will have to sell at
an opportune time, or an inopportune time. If you keep the necessary amount in cash you can let your investments continue to grow uninterrupted. Maybe even keep 2 years of RMD's in cash and only replenish your RMD "cash savings" when the markets are favorable.

Another option is not to sell anything. You can arrange to have securities ownership transferred directly from your 401k/IRA account to a taxable brokerage account. You only need to transfer enough to satisfy the RMD. You will still incur the tax liability on the value of the transfer, but at least you did not have to sell the securities at a time when you may not have wanted to.

The added advantage of this type of transfer is that if you hold the securities in the brokerage account for at least a year before selling, your cost basis is as of the transfer date, and any gains will be taxed at the capital gains tax rate rather than the ordinary income tax rate that RMD's are taxed at.

No one likes to be told what to do, but in the case of RMD's they may not be as bad as they may seem:
• You are withdrawing an amount that still lets your saving grow, and more importantly, last, for 25+ years.
• There is no requirement to ever sell any securities to satisfy the RMD.
• If you don't need the RMD for expenses, or at least not all of it, it can be re-invested to keep that money growing.
• Even with very conservative returns and 20 years of RMD's you can still retain at least 2/3 of your original balance.
• Use the RMD amount to pay the taxes owed on it and re-invest the remainder. You don't have to spend it!

You do have a few options that can make RMD's work a little more in your favor, if you plan ahead.

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