RMDs Will Be a Heavy Lift for Those Who Delayed Them | Barron’s
Retirees who have postponed taking this year’s required minimumdistributions (RMDs) from their 401(k)s and individual retirement accounts face a bitter task before year-end: withdrawing assets when portfolio values are deflated.
The average 60/40 portfolio—a common allocation for retirees with 60% in stocks and 40% in bonds—is down some 25% as of mid-October. RMDs are calculated based on account values at the end of the prior year. So the amount investors will have to withdraw will seem inflated relative to their current account values.“People often postpone RMDs to let their assets continue to grow tax-deferred aslong as possible, but this year waiting could mean a bigger bite out of an account’s value,” says Steven A. Baxley, head of tax and financial planning at Bessemer. “You would have been better off taking RMDs early this year.”Tax law requires investors with 401(k)s, IRAs and other tax-deferred retirementaccounts to begin taking annual withdrawals after turning age 72. The annual required distribution is calculated by dividing the account value at the end of the previous year by a life expectancy published by the IRS based on current age.Distributions are mandatory whether you need the money to live on or not, andthey are subject to income-tax rates in the year they are taken.Consider the potential negative impact of postponing RMDs this year, assumingan account invested in a 60-40 portfolio. A 74-year-old investor whose IRA’s assets were valued at $500,000 at year-end 2021 would have to take a $19,607 RMD this year. If he had taken it on Jan. 1, his account would have been left with $480,393. After tumbling 25% this year, the IRA’s value would currently be just under $360,295.