Retirees who have deferred taking this year’s required minimum
distributions (RMDs) from their 401(k) and individual retirement accounts face a bitter task before the end of the year: withdrawing assets when portfolio values are deflated.
The average 60/40 portfolio — a common split for retirees with 60% stocks and 40% bonds — is down about 25% in mid-October. RMDs are calculated based on account values at the end of the previous year. Thus, the amount investors will need to withdraw will appear inflated relative to the value of their current account.
“People often defer RMDs to let their assets continue to grow tax-free, because
as long as possible, but this year waiting could mean a bigger share of an account’s value,” says Steven A. Baxley, head of tax and financial planning at Bessemer. “You would have done better to take RMDs at the beginning of this year.”
Tax laws require investors to have 401(k), IRAs and other tax-deferred retirement plans
accounts to start taking annual withdrawals after reaching age 72. The required annual distribution is calculated by dividing the account value at the end of the previous year by an IRS-published life expectancy based on current age.
Distributions are mandatory whether you need the money to live on or not, and
they are subject to income tax rates in the year they are taken.
Consider the potential negative impact of postponing RMDs this year, assuming that
an account invested in a 60-40 portfolio. A 74-year-old investor whose IRA assets were valued at $500,000 at the end of 2021 is expected to take an RMD of $19,607 this year. If he had taken it on January 1, his account would have ended up with $480,393. After dropping 25% this year, the IRA’s value would currently be just under $360,295.