With the calendar year winding down, many older investors with IRAs are finally satisfying the IRS's yearly requirement that they take at least a minimum amount of money out of these accounts before the official deadline.
This doesn't mean you or anyone else must simply pocket a pile of cash you may or may not need right now, however. If you like, you can reinvest this required minimum distribution. If that's your plan, though, there are some things you might want to know about the process and your options.
What exactly is an RMD anyway?
On the off-chance you aren't already aware, RMD is an acronym for "required minimum distribution." Just as the name suggests, this is the annual removal of money from a contributory IRA, 401(k), or other type of non-Roth retirement. Although you have until April 1 of the year after you turn 73 to take your first RMD, after that, these annual distributions must be completed by Dec. 31.
These are generally taxable transactions, by the way -- one of their biggest complications. Almost all contributions to traditional IRAs are made with pre-tax earnings, so you still owe the IRS taxes on what it considers taxable income as it comes out of these accounts. These distributions are also taxed as ordinary income, possibly pushing you into a higher tax bracket the year in which they're received.
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But what's the typical minimum required distribution? That's the other complicated piece of the puzzle. It changes depending on your age.
Your first year's required minimum is just a little less than 4% of the previous calendar year's ending value of the account. Your brokerage firm should be able to give you an exact figure. This number is recalculated every year, though, based on each preceding year's year-end balance. Although this calculated proportion of your retirement account grows over time as you get older, usually making the RMD grow too, keep in mind that the assets remaining in the account are also still (hopefully) building value.
You should also know that while there's a yearly minimum distribution requirement, there's no maximum. You can remove more than the minimum requirement in any given year. Most people don't, simply because doing so adds to their tax bill and reduces the amount of money left in the tax-advantaged account that could otherwise continue growing.
Four things you need to know about required minimum distributions
Just as a thought exercise, however, let's assume you're only going to take the smallest possible distribution this year (based on 2023's year-end balance), not because you need the money but only because you're required to do so. You intend to put this money right back to work outside of the IRA it came from.
Even then, there are some things you'll want to consider. Here's a rundown of the four biggest.
1. You don't necessarily have to sell just to rebuy
Most retirees will satisfy their minimum distribution requirement with cash, even if doing so requires the sale of an investment in a stock, bond, or mutual fund.
That's not a necessary step, however. If you're simply going to repurchase the same stock, bond, or fund with the very same money, you can make what's called an in-kind transfer. As the name implies, this is the movement of specific investments from an IRA into a traditional, taxable brokerage account. Contact your brokerage firm or 401(k) plan administrator to make it happen; your broker or administrator will also be able to provide you with a specific dollar value for this type of distribution based on the value of the transfer the day it's completed.
2. It's a perfect opportunity to rebalance and optimize your portfolio
Conversely, freeing up a bunch of cash to fulfill the IRS's yearly distribution requirement is a prime opportunity to rebalance your portfolio's overall diversification.
Consider how it has changed as a result of the distribution. Your tax-advantaged account is suddenly smaller, while your taxable account is now bigger. If you're already collecting enough income from other sources, for instance, it might not make sense to buy high-yielding dividend stocks with the new money added to your taxable brokerage account since this dividend income is taxable as it's received.
3. You might be able to put money back into an IRA
Third (although it probably won't apply to most people), even if you're currently taking RMDs out of an IRA, you can still make contributions of work-based wages back into a retirement account, including the very same IRA your required minimum distribution is coming out of.
The IRS doesn't care exactly where this contributed money comes from, just as it doesn't care how or which of your retirement accounts are used to meet your minimum distribution requirement. You just need earned income of at least as much as you're putting back into the account or any other IRA.
And yes, these non-Roth contributions can still be tax-deductible in many cases, even as RMDs are simultaneously treated as taxable income.
The usual contribution rules apply, of course. Chief among them is the fact that for the 2024 tax year, the maximum contribution for those 50 or older is $8,000 into an IRA,. And again, you'll need actual work-based earned income that are at least as much as you're contributing back into these retirement accounts.
4. Timing the distribution can matter
Finally, although any given year's specific RMD amount is etched in stone at the end of the previous tax/calendar year, this doesn't mean you must liquidate a position or make an in-kind transfer on the first possible or last possible day to do so. If you're selling or swapping out one investment for another, it can pay to wait for a better exit point and then be patient while waiting for any reentry point.
Remember, the amount of your required minimum distribution is a specific dollar figure. You'll ideally fulfill this requirement with the smallest proportion of assets possible since that will leave more money in the tax-advantaged account, where it will continue to grow. This means taking your distribution when your retirement account's asset values are inflated.
Just don't get too tangled up by the effort to perfectly time the market, particularly if you're going to turn around and put this money right back to work outside of the IRA. Plenty of investors have ended up doing themselves more harm than good in an effort to be laser-precise with their buys and sells.
