Suzanne Shier, the director of wealth planning and tax strategy for wealth management at Northern Trust in Chicago, says many of her clients choose to do qualified charitable deductions and find it very helpful. Investors can opt to fulfill up to $100,000 of their annual RMD from IRAs by making a direct distribution to a qualified charity.
“Coming to the golden age of 701/2,” she says, is one trigger for RMD conversations. The other is inherited retirement accounts. Non-spousal beneficiaries are often surprised to learn they must take annual RMDs. Their exact start date depends on many variables, including the age of the decedent, but “they don’t have benefit of waiting until they’re 701/2,” she says. Spouses are permitted to treat inherited retirement accounts as their own.
Individuals who’ve had a death in the family during the year should take a close look at any retirement accounts they may be beneficiaries of and get some guidance on what the distribution requirements will be, says Shier.
When her clients are around age 50, she starts speaking to them about their retirement options and when they can take distributions (permitted and required) from their 401(k)s and IRAs. A very real concern for individuals, she says, is figuring out what level of withdrawals will be sustainable so income doesn’t exceed life expectancy. They need to factor in lifestyle decisions, such as whether they want to downsize the family home, she says.
When considering which accounts to take RMDs from, she encourages investors to consider fees, investment options and whether they want to consolidate multiple accounts. “Personally, I’m a ‘simple is better’ person,” she says. If clients leave their 401(k) assets in their former employer’s plan or roll it into an IRA, she double checks to make sure they have scheduled taxes withheld from their RMDs each year.
Shier’s clients don’t ordinarily think specifically about where to reinvest distributions received from 401(k)s or IRAs. “They would’ve created an overall investment approach that’s aligned with their goals,” she says, “and then they would slot this distribution into the sleeve that they are making additions to.”
RMDs create a big shift in assets for individuals over 701/2, with retirement assets declining and nonretirement assets staying steady or increasing. So she encourages them to frequently review not only who their beneficiaries are but how they’re being taken care of in their overall estate plan.
Gary Shor, a financial planner with AEPG Wealth Strategies in Warren, N.J., says some clients use RMDs to pay off living expenses or pay down high mortgages. Others use the distributions to fund their grandchildren’s 529 college savings plans. Whether the tax deferrals received on the 529 plan contributions offset the taxes incurred on the clients’ RMDs depends on their tax bracket, he says.
Sometimes clients opt to take in-kind distributions (taking the distribution in the form of the securities held in the retirement plan, rather than in cash), which they slide over to an institutional brokerage account, he says.
Individuals may also bump up their federal withholding tax on RMDs they take at the end of the year in order to make up for and avoid penalties for failing to pay enough in estimated taxes during the year, says Shor. “You can withhold up to 100% on RMDs if the custodian allows this,” he says. This strategy can be employed with RMDs from 401(k) plans, IRAs and inherited retirement accounts, he notes.
Education Efforts
Soltis Investment Advisors, a firm with offices in Salt Lake City and St. George, Utah, regularly offers readiness education to the participants of the qualified plans Soltis manages. These sessions cover RMDs, Social Security, Medicare and other must-know topics.
Plan participants are told they can direct their own RMD or that the plan provider will automatically calculate and distribute it if they don’t provide any direction. Typically, participants will direct it themselves, says Tyler Finlinson, the director of business development and a senior advisor at Soltis.
The firm holds proactive conversations with its wealth management clients about how to satisfy their RMDs requirement. Afterwards, “It’s never really a mystery to them of what it’s going to look like,” says Clark Taylor, Soltis’s vice president of wealth management services.
Retired clients typically roll their 401(k) plan into an IRA. Some have distributions pulled monthly or quarterly; others wait until year’s end in order to get more tax-deferred growth. Soltis runs tracking reports to make sure distributions aren’t overlooked. “If clients haven’t completed their RMD by early November, we’re all over them,” says Taylor.
Although many of Soltis’s wealth management clients need their RMDs to satisfy living expenses, more clients are starting to say, “I don’t really need this money. I hate to have it come out. What do I do with it?” says Finlinson.
The firm generally helps clients reinvest their RMD proceeds in a taxable account or, if someone has one, a revocable trust or a joint account with the rights of survivorship, says Taylor.
Participants in the 401(k) plans that Soltis manages can reach out to the firm for advice and assistance regarding reinvesting their RMDs. “Typically, when they get to that stage, we are eager to sit down with them and try and help them build/understand how they build an income stream from all their assets,” says Finlinson.
The firm also helps its many charitably active clients donate RMDs directly to charities so the proceeds don’t hit their adjusted gross income. “We also can take that a step further,” says Finlinson, by helping clients donate shares that have experienced big gains. This helps mitigate some tax exposure.
The bottom line: RMDs aren’t a one-and-done—and investors need continual help, even if they don’t realize it.