How to Handle Required Withdrawals From Retirement Accounts


Is there a recommended strategy for taking required withdrawals from retirement savings in this horrible market? I’m a buy-and-hold investor; normally, I would just hunker down, not look at my balances, and ride out this storm. Unfortunately, the Internal Revenue Service makes me sell stocks at the worst time. Any recommendations for this unprofitable task?

These questions allow me to tackle several issues involving retirement accounts and required minimum distributions, or RMDs. These withdrawals, of course, are part of the bargain we strike with the government when we open an IRA or similar account: We get decades (if we plan wisely) of tax-deferred growth, but we must start tapping these 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 late in the year to withdraw the necessary funds from IRAs and the like. And, before we get to specifics, please know: The picture might not be as bleak as it seems.

A bear market doesn’t change the size of your RMD. It’s important to start with this point: The fact that markets are down this year doesn’t mean your RMD in 2022 will be lower, as well. (As some retirees believe.)

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

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

The IRS isn’t “making” you sell stocks. To begin, you can use cash in your IRA—if you have it—to satisfy your RMD, says

Ed Slott,

an IRA expert in in Rockville Centre, N.Y. Indeed, it’s a good idea to keep some cash in your retirement account for just this purpose.

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

But let’s say all your IRA assets are invested in the markets. You don’t have to sell investments to meet your RMD; rather, the transaction can take place “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 transfer counts for your RMD. Yes, you will pay tax on the value of the stock (or stock fund) on the date the assets leave your IRA. And that value becomes your new “cost basis” if and when you sell the stock that’s now sitting in your taxable account.

Again, the point is: You haven’t “sold” anything—and certainly not at today’s depressed prices. You still own the assets; you’re simply holding them outside your IRA instead of inside.

(We should note here: RMD rules apply to inherited IRAs, as well.)

Is there a better/best time to do this? Hard to say. Picking the perfect moment during the year to take your RMD involves timing the markets, which is all but impossible. As such, it helps to look at 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 sizable rally in the year ahead. You might regret, naturally, missing out on the gains, gains that would have been sheltered inside your tax-deferred IRA.

Take a deep breath. With the required withdrawal now sitting in a non-IRA account, “buy and hold” can work in your favor, Mr. Slott says. For instance, if you hold the assets more than one year, any appreciation will be taxed, favorably, as long-term capital gains. By 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. That’s because your heirs would receive a step-up in basis. Again, by contrast, IRAs don’t receive a step-up; when the account holder dies, the beneficiary of the IRA inherits the deceased owner’s basis without any adjustment.

Note: Congress suspended RMDs in 2020 due to Covid-19; that’s highly unlikely to happen in 2022.

For many retirees, RMDs aren’t as big an issue as they first appear. Yes, required withdrawals are upsetting to many. But when placed in perspective—when stacked up against your nest egg as a whole—they begin to look less intimidating.

As you’re probably aware, RMDs are based on IRS life-expectancy tables. At age 72, when withdrawals begin, only 3.65% must be withdrawn, Mr. Slott notes. At age 80, the figure is still only 4.95%. At age 90, it’s 8.2%.

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

The IRS could be doing you a favor. Really. Again, no one likes being forced to remove assets from their savings. But if you look at RMDs in terms of tax rates, and you should, required withdrawals may turn out to be a benefit, at least for the next few years.

“Most people taking RMDs now are getting funds out at historically low tax rates,” Mr. Slott says. “These funds can’t stay protected in IRAs forever. They will have to be withdrawn and taxed in full at some point. So, you may as well get them out when rates are low. And that might be right now for many.”

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

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