Richard Drury | Digitalvision | Getty Ideas
After funneling money into pretax retirement accounts, you will eventually face mandatory withdrawals in retirement recognized as required minimum distributions, or RMDs.
Since RMDs can trigger higher taxes, the withdrawals can be a nuisance for some retirees who do not distress the money. But the yearly activity could offer a chance to improve your portfolio, experts say.
“Ultimately, you look at your portfolio and say, what do I wish for to trim?” said certified financial planner Matthew Saneholtz, chief investment officer and senior wealth advisor at Tobias Pecuniary Advisors in Plantation, Florida.
More from Personal Finance:
Trump vs. Harris: Here’s how the election could adopt your taxes
Parents boost college savings to shield kids from ‘crushing’ student loan difficulties
How EVs, gasoline cars compare on total cost — where you live makes a difference
Since 2023, most retirees needfulness to begin RMDs by age 73, based on changes enacted by Secure 2.0. That age jumps to 75 starting in 2033.
While the annual RMD deadline is Dec. 31, you determination have until April 1 after the year you turn 73 to make your first RMD. If you skip yearly RMDs or do not bear enough in a given year, there is a 25% penalty on the amount you should have withdrawn.
Rebalance your investments
Your asset allocation, or investment mix, sweeps throughout the year as markets move. But you can use RMDs to shift assets back to your intended percentages, based on gamble tolerance, goals and timeline.
“Every client in my practice has a target asset allocation, so I sell a holding from whichever asset group or classes they happen to be overweight in at the time,” which is typically U.S. stocks, said CFP Paul Winter, president of Five Seasons Economic Planning in Salt Lake City, Utah.
Every client in my practice has a target asset allocation, so I sell a favour from whichever asset class or classes they happen to be overweight at the time.
Paul Winter
President of Five Seasons Fiscal Planning
As you weigh assets to sell, you should avoid selling investments when they are down to avoid the styled sequence of returns risk, which can shrink your portfolio over time, experts say.
Withdrawing assets during hoard market downturns could mean selling more investments for the same-sized RMD. That could leave fewer investments to catch future growth when the market rebounds.
Shift your ‘tax location’
You can also use RMDs to adjust your “tax situation,” or the types of investments in certain accounts to minimize future levies, Saneholtz said.
Withdrawals from pretax retirement accounts lay oneself open to regular income taxes, depending on your federal bracket, and brokerage accounts are subject to