With the official start to fall comes the year-end planning period, which is often a busy time for financial advisors as they help clients consider any remaining calendar-year-based opportunities (like maximizing state tax deductions for 529 contributions and managing fund-based long-term capital gains distributions) as well as ensuring clients have met any annual financial requirements.
Seniors 72 or older, for example, must take the required minimum distributions (RMDs) from their retirement accounts, which feels particularly cruel this year. The RMD amount, set based on age and asset values as of December 31 of the prior year, means distribution amounts this year are based on near-peak portfolio values. Meanwhile, distributions made in Q4 are not only likely to lock in losses, but also distribute a higher percentage of account assets than was originally intended.
The unique combination of declining account values in parallel with the rising cost of living is particularly challenging for retirees. In some prior years (2009 and 2020), Congress waived RMDs. But without that relief for 2022, there are a few other strategies worth considering, especially for the 20 percent of seniors who are not drawing their RMDs to meet specific income needs.
1. Cash Reserve: Many advisors will recommend establishing a cash reserve within the IRA during years with strong market returns that can cover the income need or RMD amount in years of market decline. This helps prevent locking in losses and having to sell larger portions of the portfolio to meet RMD requirements or income needs. For those with a cash balance within their IRA, this might be a good starting point for meeting any remaining RMD requirements.
2. In-Kind Distribution: Although it will take more shares to meet the RMD requirement than prior to the market decline, taking an in-kind distribution (or having stock distributed intact to a non-qualified brokerage account) will avoid having to sell the position in a depressed market. There might be other benefits to this strategy for those who can continue to hold the position; if the position is held at least one year from the transfer or distribution date, any gain during that period could benefit from long-term capital gains treatment, rather than being taxed as ordinary income. Last, the client may benefit from the fact that the basis for the transferred position is the price on the date of transfer, not the original purchase price within the retirement account.
3. Qualified Charitable Distribution (QCD): One last consideration might be a QCD, which, in the right circumstances, could kill three birds with the same stone: meeting RMD requirements, reducing the associated tax burden, and contributing to an eligible charitable organization of the taxpayers choice. There are a number of rules and limitations surrounding this strategy, so seniors are advised to work with tax and financial advisors who are both familiar with and up to date on the various requirements.
While the market continues to prove challenging, helping clients consider alternative RMD strategies that fit their situation and preferences while helping to minimize the negative impact could be a bright spot in your Q4 planning and may be another way to continue adding value to your client relationships.
Christy Charise, Founder & CEO of Strategic Advisor www.strategicadvisor.co