If You Haven't Taken RMDs Yet in 2022, Watch This Video

Key Takeaways

• People who are over age 72 and have tax-sheltered traditional retirement accounts will be subject to required minimum distributions.
• In the case of 2022 RMDs, they're based on Dec. 31, 2021, balances.
• The gold standard would be to have some sort of cash holdings that you're pulling from on an ongoing basis.
• If you don't need the money and you want to reinvest the funds, you should do so.

Susan Dziubinski: Hi, I'm Susan Dziubinski for Morningstar. We're coming into the home stretch for 2022, and the Dec. 31 deadline for required minimum distributions is fast approaching. Joining me to discuss what you should bear in mind if you haven't yet taken your RMD is Christine Benz. She is Morningstar's director of personal finance and retirement planning.

Christine, thanks for being here.

Christine Benz: Susan, great to see you.

Dziubinski: Let's start at the beginning. Who is subject to RMDs and for which accounts?

Benz: Generally speaking, people who are over age 72, who have tax-sheltered traditional retirement accounts will be subject to required minimum distributions. One notable carve-out, which is increasingly prevalent is folks who are still working at age 72 and contributing to a 401(k) plan or other company retirement plan, they can skirt the RMD on that account, on that 401(k) account. If they have IRA assets, those will still be subject to required minimum distributions, but that is a carve-out. It's also important to note that you can't be a primary owner of the business in which you're employed in that situation.

Dziubinski: You say that this year people should prepare themselves for some sticker shock as they look at the amounts that they need to take out for 2022. Why is that?

Benz: Well, it's because your required minimum distribution amount is kind of cooked as of the year-end of the previous year. So, in the case of 2022 RMDs, they're based on Dec. 31, 2021, balances. The market was really good in 2021, not so good in 2022. So, you're having to take out a larger RMD than you might expect, and then in turn the tax bill might be larger on that RMD than you might expect.

Dziubinski: In past years, Christine, we've talked about where to go to take your RMDs, which investments you should be pulling from. Do you have any guidance this year considering that most investments have probably declined in value?

Benz: Well, I would say the gold standard would be to have some sort of cash holdings that you're pulling from on an ongoing basis. A corollary is, if you have had income distributions from your holdings and you're having those swept over into some sort of a brokerage sweep account, those would be good funds to withdraw. The name of the game is not withdrawing depressed securities if you can possibly avoid it. One other category I would look to if the combination of your cash and your income distributions aren't enough to meet your RMDs would be to just take a good look at your portfolio from an asset-allocation standpoint, see whether you're in line with where you need to be with your portfolio. But also look at any problem spots that might lurk inside the portfolio. Maybe you have holdings that you're just not thrilled with for whatever reason. Those might be good holdings that you could pull from to meet your RMDs.

Dziubinski: And what about reinvesting your RMDs? Is that allowable, and if yes, is it advisable for people?

Benz: I often say, it's required minimum distribution, not required minimum spending. So, even though I do know plenty of retirees who kind of think of their RMDs as mad money, if you feel that you don't need the funds or for whatever reason, your RMD is going to take you over your planned withdrawal rate, you should get the funds back into some type of account. What account kind of depends on your situation. If you are taking RMDs and you are still working and have earned income, you can actually put the funds right back into an IRA, and in this case, I would urge a Roth IRA because you don't want to be subject to RMDs from the thing that you just put in there. So, look at a Roth IRA if you have earned income or if your spouse has earned income. Alternatively, you could move the money into a taxable account of some kind. So, you could manage that account pretty tax-efficiently on an ongoing basis using index funds and perhaps municipal-bond funds. So, by all means, if you don't need the money, and you want to reinvest the funds, you should do so.

Dziubinski: And then, lastly, Christine, you've talked a little bit about a strategy of taking RMDs in kind to maintain exposure to a particular part of the market. Talk about how that works.

Benz: This is something I don't hear a lot about, but I think that some retirees ought to consider. The first thing to note is that the basic idea here is that you're pulling the securities from your IRA as you need to do to meet the RMD, but then you're transferring it into some other account, a taxable brokerage account most likely. And the idea is that your tax bill on the distribution is what it is. There's no avoiding it. But the advantage of doing the in-kind distribution where you're taking the securities and moving them from one account to the next is that you're maintaining consistent economic exposure to that category, and this can be especially appealing if it's some unloved, deeply unloved category that has really taken a pummeling so far this year. You can move the funds without any interruption, which I think if you were to take the funds and then reinvest with a bit of a pause in there, you risk missing a good market day or two. So, there's that uninterrupted market exposure.

The other advantage is, if you have some position that you think is deeply unloved, you can take the position out, pay the taxes due on the RMD and essentially extricate a portion of that holding or perhaps the whole holding with a relatively low tax bill attached to it. Then when you move the funds eventually to this brokerage account and perhaps sell down the line, you'll be able to pay capital gains taxes on any appreciation from your new purchase price. So, it's a strategy to consider if you have those deeply unloved holdings that you really like inside your portfolio and you want to maintain exposure.

Dziubinski: Well, Christine, thank you for your time today. These are great strategies for us to be thinking about during RMD season and time is ticking away.

Benz: That's right. Thanks, Susan.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thanks for tuning in. Watch "Is It Too Late to Inflation-Proof Your Portfolio?" for more from Christine Benz.