Before the end of the year, everyone age 72 or older will have to take required minimum distributions (RMDs) from their tax-advantaged retirement accounts—401(k)s, IRAs, etc. These distributions count as taxable income.

But this year’s mandatory withdrawal may feel especially painful, since the required distribution amounts are based on account values at the end of the previous year, when market values were some 20% higher than they are today. That means retirees will have to take out a larger chunk of their nest eggs than usual.

There are, however, a few legal work-arounds to reduce the sting of selling in a down market.

In-kind Distributions
Rather than take distributions in cash, clients can take an equivalent amount of assets and reinvest them in a taxable account. It’s called an in-kind distribution. “This allows the client to not sell anything, just move some stock from one account to another,” said Al Meadows, a senior wealth advisor at Gratus Capital in Atlanta.

The tactic is essentially the same as selling enough shares of an IRA or 401(k) to meet the RMD, and then buying the shares back via a separate brokerage account. “There are no tax advantages [to this method],” Meadows acknowledged, but there is a psychological benefit. “It can allow a client to feel good about not selling while the market is down,” he said.

When clients have to sell shares at depressed values, they often feel as if they’re chopping down a beloved tree when it’s wilting, said Lou Barberini, a financial advisor in San Francisco. He encourages them to think of it instead as transplanting the tree to a new orchard.

Roth Conversions
Barberini also recommends clients convert as much of their traditional IRA assets to a Roth IRA as they can, to reduce the RMD burden. In Roth IRAs, the assets can grow tax-free. After the first five years, they can be withdrawn tax-free, too. Only the conversion itself is taxed. What’s more, Roth IRAs are never subject to required minimum distributions.

Roth conversions do not satisfy the RMD requirement, however. Clients will still have to take the required minimum distribution for the current tax year before they can convert to a Roth IRA. But they can use all or part of the RMD funds to pay the taxes due from the conversion.

“Transferring to a Roth IRA from a traditional [retirement account] is superior to transferring from a traditional [retirement account] to a brokerage account,” said Barberini. “The Roth is tax-free forever.”

Life Insurance And Qualified Charitable Distributions
Another option for clients is to use their RMD money to fund a life insurance policy. This way, their money can help an heir. Depending on the policy, the client can also borrow against the insurance later or even use it to pay for long-term care in the future.

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