RMD Strategies for a Rocky Market Ride

by Prof. Robert Bloink and Prof. William H. Byrnes

Recent market volatility and general uncertainty about what the future holds have left clients struggling with a host of questions. While general advice dictates that it’s not a smart move to sell assets until markets have rebounded significantly, some retirees may be left with little choice. Clients who have reached their required beginning date (RBD) have no choice but to take required minimum distributions (RMDs) from their tax-preferred retirement accounts before year end. While December 31 is still months away, it’s entirely possible that we may be in for a rocky ride if the Trump administration continues its far-reaching 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 the client’s unique financial position. Advisors can begin working with clients who have yet to satisfy their RMD obligations today to develop strategies based on ongoing market conditions as the year progresses.

RMD Rules: The Basics

Clients who fund 401(k)s and IRAs with pre-tax dollars aren’t permitted to defer taxation indefinitely. Generally, once a client reaches their RBD, they must begin taking distributions by April 1 of the year after the year they reach their RBD. Currently, the RBD is 73. Clients who turn 73 in 2025 must take their first distribution by April 1, 2026. For each subsequent year, the deadline is December 31.

The original SECURE Act increased the RBD from age 70 ½ to age 72. The successor SECURE Act 2.0 Act gradually increased the RBD from 72 in 2022 to 73 in 2023 and up to age 75 by 2033. The laws did not provide retroactive relief. Taxpayers who turned 70 ½ prior to the SECURE Act becoming law are required to continue taking distributions even after the RBD was changed.

RMDs are typically required regardless of market conditions and without exception. Congress has, however, waived RMDs in years where market conditions were extremely depressed—including for 2009 and 2020.

What to Know About RMDs in a Down Market

RMDs are calculated based on the client’s life expectancy and the total value of their 401(k) or IRAs as of December 31 of the prior year. Thus, RMDs for 2025 are calculated based on account balances as of December 31, 2024. That means there’s really nothing clients can do at this point to 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 RMDs. That created a significant amount of confusion for retirees. When RMDs were waived in 2009, that was based on the market downturn that really the year before.

Clients with diversified portfolios may, however, have some room to use the down market to their advantage. When markets are significantly down, taxpayers may wish to draw RMDs from “safe” asset buckets, such as cash or bonds. When the 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 some protection against future market downturns.

Clients who have securities in their portfolio that they believe are depressed in value and are likely to appreciate once the market rebounds may wish to explore the idea of transferring those securities to a taxable brokerage account. In that case, the value of the transferred securities is taxed at ordinary income tax rates at the lower value at the time of transfer. If the securities do appreciate in value, the basis in those securities 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.

It's also important to remember that market downturns can actually be a good time to execute a Roth conversion. While conversions don’t satisfy the client’s RMD obligations, if the client wished to execute a conversion strategy anyway, lower values on securities that are converted will result in lower tax liability upon conversion.

Conclusion

Many clients are understandably nervous in the wake of the latest market turbulence. Absent Congressional action, RMD obligations will continue in place regardless of what the future holds. Clients can, however, make smart moves based on their portfolio allocations and conditions at the time of the RMD.