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Christine Benz

Retirement Planning > Spending in Retirement > Required Minimum Distributions

‘Will RMDs Drain My Account?’: Morningstar's Benz Answers a Common Retirement Question

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What You Need to Know

  • Retirees can reinvest their RMDs, Benz points out.
  • Retirees can use different strategies to reduce RMDs and overall retirement asset withdrawals.
  • A large age gap between spouses may come into play for a retiree's RMD reinvestment strategy.

Retirees worried that required minimum distributions could jeopardize their financial well-being should keep in mind they don’t have to spend the money withdrawn from their retirement plans and can put it back to work in their portfolios.

“You have to take the distribution but you can reinvest it!” Christine Benz, Morningstar’s director of personal finance and retirement planning, recently told ThinkAdvisor via email, expanding on a column she wrote on retirement account withdrawal rates. 

The U.S. government requires owners of tax-deferred retirement accounts — traditional IRAs and employer-sponsored retirement plans — to take minimum distributions, or RMDs, each year starting at 72 years old, based on calculations related to account balances and age.

It’s possible but unlikely that RMDs would cause a retiree to prematurely deplete assets, according to Benz, who frequently receives questions from people wondering about that possibility.

“The mandatory withdrawals … are called required minimum distributions, not required minimum spending,” she wrote in her column. “Yes, you have to take the money out of the tax-deferred account and pay taxes on it, but there’s nothing saying you can’t reinvest the funds back into your portfolio,” 

Where to Reinvest

Among other options, people with earned income could place the withdrawn money into a Roth IRA. Retirees also could invest the funds in a taxable brokerage account, directing it into tax-efficient ETFs, Benz wrote. Adding municipal bonds to taxable accounts often makes sense as well for higher-income, higher-tax people who want bonds, she told ThinkAdvisor; their yields may be higher than taxable bonds once the tax effects are taken into account.

In addition, older Americans can limit their overall retirement-fund withdrawals by curbing the amounts they remove from Roth IRAs and other accounts where RMDs don’t apply, she added.

In today’s environment, with high inflation, rising interest rates and volatile markets, exactly what retirement-age people do with RMD assets depends on factors such as their personal risk profiles and investment allocations, Benz told ThinkAdvisor.

“I would let the individual situation and asset allocation parameters dictate a) where to pull the RMDs from within the IRA and b) how to reinvest any RMD proceeds,” she said. “If a retiree is reinvesting into a taxable portfolio — as is often the only option for people who don’t have earned income — it’s wise to focus on tax-efficient investments like equity exchange traded funds for stock exposure and municipal bonds for fixed income exposure.”

When considering RMD strategies, the age gap between spouses may come into play as well.

Benz suggested that couples with a significant age gap consider taking a conservative approach to spending their RMDs and reinvest more than they would otherwise. “It depends on the situation but that would be the safe way to proceed,” she said.

A separate government RMD calculation table applies to people who have spouses more than 10 years younger, she noted. “But if someone has a spouse who’s significantly younger but not 10 years younger, reinvesting some of the RMD makes sense,” said Benz.

As she explained in her Morningstar column, a 75-year-old with a 66-year-old spouse wouldn’t use the separate table for calculating RMDs that those with a decade age-gap would, but they have a big age difference nonetheless. 

Assuming the older spouse’s IRA accounts for most of their assets, and the younger spouse expects to live longer than average, “that’s a good case for reinvesting a portion of the RMDs into the portfolio as a guard against prematurely depleting assets for the younger spouse,” she wrote.

Similarly, retirees aiming to leave an inheritance or whose portfolios are conservatively invested, with limited potential returns, “would do well to reinvest a portion of their RMDs, so as to not overwithdraw,” Benz wrote.

RMD Management Strategies

Older investors may consider various strategies to limit the account balances subject to RMDs and in turn the income taxes they’ll owe on those distributions.

In a video earlier this year, Benz suggested that people in their 60s and early 70s and not yet subject to RMDs consider strategies to limit the amount of income taxes they’ll eventually need to pay on mandatory withdrawals. One maneuver might involve accelerating withdrawals from tax-deferred accounts in those earlier years to lower the balances eventually subject to RMDs, which also might lighten taxes on Social Security income once the retiree is taking required distributions, she explained.

Retirees also may be able to limit their retirement account balances subject to RMDs and lower their tax bill by channeling up to $100,000 from their IRA to charity through a qualified charitable distribution, according to Benz. (The QCD applies only to IRAs.)

Some researchers have suggested that retirees use an RMD-type system — portfolio balance divided by life expectancy — as a guide for total portfolio withdrawals, including accounts not subject to RMDs, Benz noted. The big downside, though, is that cash flows from such a system are volatile and may be unlivable for a lot of retirees, she told ThinkAdvisor.

In the alternative, Benz noted that a lot of the research on withdrawal rates points to the value in taking variable withdrawals, that is, taking less in down markets, more in good ones. She pointed to a Morningstar article that notes this method can be more efficient but tends to be better suited to “last breath, last dollar” retirees than those interested in leaving a bequest.

“I like the idea of creating a withdrawal plan rather than letting RMDs dictate the withdrawal amount in a given year,” she said.