Recent market volatility and general economic uncertainty have left clients struggling with a host of questions.
General advice holds that it’s not a smart move to sell assets until markets have rebounded significantly, but some retirees may be left with few options. Clients who have reached their required beginning date have no choice but to take required minimum distributions from their tax-preferred retirement accounts before year-end.
While Dec. 31 is still months away, it’s entirely possible that we may be in for a rocky ride if the Trump administration continues its trade war once the 90-day pause on most tariffs expires. In some cases, there are moves that can help avoid locking in market losses depending on each client’s distinct financial position.
Absent congressional action, RMD obligations will continue in place. Advisors can begin working with clients who have yet to satisfy those obligations to develop strategies based on ongoing market conditions as the year progresses.
RMD Rules: The Basics
Clients who fund 401(k)s and individual retirement accounts with pretax dollars aren’t permitted to defer taxation indefinitely. Generally, once clients reach their required beginning date, they must begin taking distributions by April 1 of the year after the year they reach that age, which currently is 73. Clients who turn 73 in 2025 must take their first distribution by April 1, 2026. For each subsequent year, the deadline is Dec. 31.
The Setting Every Community Up for Retirement Enhancement Act increased the age from 70.5 to 72. The Secure 2.0 Act gradually increased the required beginning date from age 72 in 2022 to 73 in 2023 and to age 75 by 2033. The legislation did not provide retroactive relief: Taxpayers who turned 70.5 before the Secure Act became law are required to continue taking distributions.
RMDs are typically required regardless of market conditions. Congress has, however, waived such required distributions in special circumstances, including in 2009 and 2020.
RMDs in a Down Market
RMDs are calculated based on clients’ life expectancy and the total value of their 401(k)s or IRAs as of Dec. 31 of the prior year. Thus, RMDs for 2025 are calculated based on account balances as of Dec. 31, 2024. That means, then, that clients can’t move assets around to minimize their 2025 RMDs. Of course, if markets are depressed as of year-end, RMDs for 2026 may be lower.
It's also unlikely that RMDs will be waived for 2025. When Congress waived RMDs for 2020 in March of that year, some taxpayers had already taken them. That created a significant amount of confusion for retirees. RMDs were waived in 2009 based on the market downturn the year before.
Clients with diversified portfolios may have room to use a down market to their advantage, however. In depressed markets, taxpayers could elect to draw RMDs from less risky asset buckets, such as cash or bonds. When equity markets are up, it makes sense to draw RMDs from appreciated stock to lock in those gains and simultaneously remove more risky investments from the account — essentially providing protection against future market downturns.
Clients with securities in their portfolio that they believe have lost value and are likely to appreciate once the market rebounds can consider transferring those securities to a taxable brokerage account. In that case, the transferred securities are taxed at ordinary income tax rates at the lower value at the time of transfer. If the securities do appreciate in value, their basis has been reset at the time of transfer to the brokerage account — and the subsequent gain is taxed at a lower capital gains tax rate.
Market downturns can also be a good time to execute a Roth conversion. While conversions don’t satisfy RMD obligations, if a client wished to execute a conversion strategy, lower values on securities that are converted will result in lower tax liability upon conversion.
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