The RMD conundrum of 2022

[euro]

Interesting article by Schwab regarding the RMD situation of 2022. I have not paid much attention to this as I'm not RMD age yet, but they raise an important point and offer a few possible solutions.


https://www.schwab.com/learn/story/managing-rmds-during-down-market?cmp=em-XCU




Because the market was within a few days of its high at the RMD key date of Dec 31, 2021, the RMD hit will be particularly hard this year. And, if the RMD comes out of stock heavy accounts, it means selling at low stock prices. Something we try to ovoid for obvious reasons. In addition, many RMDs are on "autopilot", meaning that the withdrawals could be done across the entire account, instead of, say, pulling from money market accounts (if they exist) only.
In any event, I thought this was a topic at least worth contemplating.

 

[Souschef]

We have had a double whammy, because not only were our IRA's high on 31 Dec, but the CG distributions in taxable accounts were high also.
With the market decline, it hurts to take out cash to pay the taxes on gains that have evaporated.

 

[Car-Guy]

Not so bad if you had everything in fixed income investments.

 

[Chuckanut]

We have had a double whammy, because not only were our IRA's high on 31 Dec, but the CG distributions in taxable accounts were high also.
With the market decline, it hurts to take out cash to pay the taxes on gains that have evaporated.

+1

It's another reason to do those Roth conversions when you can.

 

[audreyh1]

You can transfer assets in kind at many brokerages, so you could preserve the stocks at lower prices if you cared to. You’ll also be withdrawing more shares due to the lower prices and they won’t appreciate in your IRA any more.

So if you still own stocks in your IRA and can pay the taxes from other funds, withdraw in kind, and withdraw whats down the most and what’s most likely to recover in a few years.

 

[W2R]

[...]
Because the market was within a few days of its high at the RMD key date of Dec 31, 2021, the RMD hit will be particularly hard this year. And, if the RMD comes out of stock heavy accounts, it means selling at low stock prices. Something we try to ovoid for obvious reasons. In addition, many RMDs are on "autopilot", meaning that the withdrawals could be done across the entire account, instead of, say, pulling from money market accounts (if they exist) only.
In any event, I thought this was a topic at least worth contemplating.

Not so bad if you had everything in fixed income investments.

+1 I guess I'm lucky. My RMD's only come out of my TSP account (sort of like a 401K for federal employees). My TSP is 100% "G Fund", a government bond fund available to working and retired feds that doesn't rise too fast but is guaranteed to never drop in share price. The G Fund is not a road to vast wealth, but my RMDs are coming out of an extremely stable and predictable investment.

Plus, every year since retirement I have been withdrawing a few hundred dollars a month (not much but more than my present RMD's) for living expenses. So, no need to sell any stocks at all to pay my RMD's, or even withdraw any more than I had been before I hit RMD age a few years back. At this rate my TSP income will last until I'm 92, and past then I can rely on taxable accounts. I won't have to pay RMDs at that point due to $0 balance in the TSP.

Doesn't mean all this craziness in the market doesn't make me groan! But at least I don't get the double whammy with RMDs that some are getting.

 

[FiveDriver]

I use a 'Bucket' approach, where i keep 3 years of our typical RMD amount in Fidelity's FDRXX Money Fund. They do the calculus on 12/31 automatically, and send 1/12 of that amount out of the Money Market Fund into my local cheking. This Direct Deposit occurs on or around the 16th of the month and fills in behind our Pension (1st of month) and our SS (2nd Wednesday). Smooths out the Cash Flow, without selling any Stocks.

I'm sure all the big Firms offer this feature to their shareholders.,

 

[disneysteve]

Not so bad if you had everything in fixed income investments.

Unless it's in bond funds.


Vanguard Total Bond Market Index fund is down 12.57% YTD.


I have to start RMDs from my inherited IRAs this year. I have to suck 20K out of the account this year. I should have about $4,500 in cash in there by 12/1 but the rest will need to come from selling shares.

 

[marko]

Our withdrawals (via dividends and MF cap gains) are more than our future RMDs will be.

That said, can't you reivest back into the same stocks or funds without triggering a wash sale?

 

[jollystomper]

Not so bad if you had everything in fixed income investments.

Unless it's in bond funds.

One reason I am keeping my Stable Value Fund in my 401K. It will continue to grow so I will never take from it as a loss. I figure, in a situation like this year, I can take my RMD from that fund, and not be forced to take it from one of my stock funds when they are down.

 

[Sunset]

...

That said, can't you reivest back into the same stocks or funds without triggering a wash sale?

Good point!
Since the loss from an IRA can't be claimed (under practically all normal circumstances) there is no wash sale. Buying back the same stocks if a person doesn't need the money means the lower stock price is no big deal.

 

[Car-Guy]

Unless it's in bond funds.

Vanguard Total Bond Market Index fund is down 12.57% YTD.

Looks like I'm going to be up about ~7% this year in my 401k fixed assets. Best gains in more than a decade, IIRC...

 

[audreyh1]

Our withdrawals (via dividends and MF cap gains) are more than our future RMDs will be.

That said, can't you reivest back into the same stocks or funds without triggering a wash sale?

You most likely can withdraw assets in kind if you wish to preserve them. Depends on the broker.

No, selling in your IRA and buying in a taxable account does not trigger a wash sale. There is no gain or loss recognized or reported from an IRA. But you don’t even have to sell if you want to keep the asset. Just withdraw the asset.

 

[audreyh1]

Good point!
Since the loss from an IRA can't be claimed (under practically all normal circumstances) there is no wash sale. Buying back the same stocks if a person doesn't need the money means the lower stock price is no big deal.

Exactly, you’ll just have to take the funds to pay tax on the RMD from somewhere else.

And you can even withdraw assets from your IRA in kind at some brokerages.

 

[Souschef]

I have had no trouble at Fido transferring x dollars in shares from an IRA to a taxable account. No sale is required.
I normally do this for DW's IRA

 

[Andre1969]

I have two inherited IRAs that I had to start taking RMDs on as soon as they fell into my hands. I just have them both set up so that a portion of the money is in an MMA, and that's where the RMDs come from. So it's not forcing me to sell any shares of a stock or mutual fund while prices are depressed.

At least, that will work for this year. One of the IRAs only has enough cash to cover the RMD for this year. If the market continues to drop, next year I'll have to sell some shares at a depressed price. The other IRA pays out enough in dividends to cover the RMDs, for the time being at least.

 

[FiveDriver]

Looks like I'm going to be up about ~7% this year in my 401k fixed assets. Best gains in more than a decade, IIRC...

Car-Guy, I'd love to know where you're parking your Fixed Asset Allocation.
Are you in TIPS ? or the HYG ETF ?

 

[Graybeard]

Unfortunately, I need to start taking RMDs this year. As others have noted, my balance at Vanguard in my rollover IRA was huge on 12/31, not so huge today!

Fortunately, I have a good enough mix of equity funds and I exchanged out of all my bond funds in late Spring so that money is in my Settlement Fund and T bills but still those bond funds were sold at a large loss of dollars.

If the equity market goes up a lot, I'll take the RMD from equity mutual funds otherwise I have plenty in the Settlement Fund to cover the RMD and probably will put the balance into equity mutual funds in my taxable account.

My 401k is in the Stable Value Fund so that isn't volatile like equity and bond funds have been.

If you take distributions for living expenses, the distributions function as RMDs but I don't cuz I don't need to.

 

[Car-Guy]

Car-Guy, I'd love to know where you're parking your Fixed Asset Allocation.

It's through my ex mega corp... As I understand it they have some of the newer hire MBA's manage the funds according to a set of very conservative guidelines. Basically zero fees for the participants. The last ~ten years they have returned like ~3% a year on the average but this year it's looking like they are on track for a 7% return or more.

 

[ejman]

I have both Vanguard and Fidelity calculate the RMD amounts on the Dec 31 across all my IRA funds and then on the first available trading day of the New year they both sell the corresponding RMD amounts and transfer to my taxable account. Then I don't have to worry about what happens to fund values during a year such as this one. Is this the wrong way to do it?

 

[RetMD21]

Unless it's in bond funds.


Vanguard Total Bond Market Index fund is down 12.57% YTD.

Did the bond funds go down w/o a decline in the value of the underlying bonds?

 

[youbet]

Interesting article by Schwab regarding the RMD situation of 2022. I have not paid much attention to this as I'm not RMD age yet, but they raise an important point and offer a few possible solutions.

I'm a long term, happy Schwab customer. But this article did not impress me. It seems to be making a much bigger deal out of the situation than is justified.

Yes, having the value of my TIRA peak near 12/31 is causing my RMD to be several percent larger (depending on the alternate peak dates you hypothesize) than it might have been had the timing of the peak been different. Hardly a disaster. Sure, it would have been sweet to have the timing been such that the account bottomed on 12/31 and had grown after that, but, ya know, sometimes ya bite the bear and sometimes the bear bites you. The unfavorable scenario is something I've always kept in mind in RMD strategy and I'm handling it with no big issues because it's an event easily planned for.

So many are mentioning having to sell equities in this down market to fund the inflated RMD amount. Hmmmmm....... You take a RMD every year and should be planning to do so. Having an extremely high equity allocation in your TIRA knowing you'll need to make a distribution by EOY is really asking for trouble. Even if the unfortunate timing of the market peak had not occurred, you'd be in the same position only with the distribution amount being a bit smaller.

And, of course, Schwab does allow distributions in kind, so other than coming up with the tax dollars, you don't have to sell anything, ever. You just have to give the tax-man his due.

 

[audreyh1]

I have both Vanguard and Fidelity calculate the RMD amounts on the Dec 31 across all my IRA funds and then on the first available trading day of the New year they both sell the corresponding RMD amounts and transfer to my taxable account. Then I don't have to worry about what happens to fund values during a year such as this one. Is this the wrong way to do it?

No, it’s fine.

 

[audreyh1]

So many are mentioning having to sell equities in this down market to fund the inflated RMD amount. Hmmmmm....... You take a RMD every year and should be planning to do so. Having an extremely high equity allocation in your TIRA knowing you'll need to make a distribution by EOY is really asking for trouble. Even if the unfortunate timing of the market peak had not occurred, you'd be in the same position only with the distribution amount being a bit smaller.

And, of course, Schwab does allow distributions in kind, so other than coming up with the tax dollars, you don't have to sell anything, ever. You just have to give the tax-man his due.

Not to mention that it usually makes far more sense tax-wise to have equities in taxable and thus a big slug of fixed income in IRAs unless most of your investments are in IRAs which means you didn’t do Roth conversions to shrink your IRAs before RMD time……

It usually works better to have the slower growing investments in your IRAs to reduce your RMD long term. And to plan for withdrawals well ahead of time of course.

And if all else fails distribution in kind…..

 

[Graybeard]

I have both Vanguard and Fidelity calculate the RMD amounts on the Dec 31 across all my IRA funds and then on the first available trading day of the New year they both sell the corresponding RMD amounts and transfer to my taxable account. Then I don't have to worry about what happens to fund values during a year such as this one. Is this the wrong way to do it?

Not for 2022! I bet all of us wish we took the RMD on 1/3/22.