Calculating required minimum distributions from traditional IRAs, 401(k)s and other qualified retirement plans is pretty straightforward for those using lifetime expectancy tables from the Internal Revenue Service. But even if investors remember to take annual RMDs after age 701/2 (many don’t), they could use help preparing for and managing the process. This includes reinvesting RMDs they don’t need immediately for living expenses.

“When it comes to the RMD world, it isn’t as simple as ‘Here’s your RMD, now go take it,’” says Gerald Wernette, principal and director of the retirement plan consulting group at Michigan-based Rehmann Financial. “There are a lot of moving parts to be thinking about,” he says. These include complex rules, personal goals and state tax implications for wherever investors plan to reside during their retirement years.

The stakes of getting RMDs right are higher than ever. Baby boomers (10,000 of whom are turning 701/2 every day) are retiring with large deferred balances instead of the defined benefit plans their predecessors often had.

“Individuals retiring today, they’re an RMD generation,” says Maria Bruno, a senior investment strategist in Vanguard’s Investment Strategy Group in Valley Forge, Pa. But while retirees are thinking about RMDs more proactively, many still need help with the basics.

Her recent blog post about an RMD newbie—who learned the hard way (via an IRS penalty) that he had to take separate RMDs on his 401(k) and traditional IRA—received a flood of comments, many with questions. As she explained in her post, RMDs must be calculated separately and distributed separately from each employer-sponsored account. But RMDs for IRAs can be aggregated, and the total can be withdrawn from one or multiple IRAs.

The failure to take a required minimum distribution results in a penalty of 50% of the RMD amount. Individuals can postpone their initial distribution to April 1 of the year after they turn 701/2. Subsequent RMDs must be taken by December 31. If a distribution is postponed, two must be taken that year.

Wernette recently informed a plan participant over age 70 that he isn’t required to take a distribution from his 401(k) plan because he’s still working and owns less than 5% of the business (an IRS stipulation). Wernette also told him he can stop taking RMDs on any traditional IRAs and former employers’ 401(k) plans if he rolls them into his current 401(k) plan. Employees must contact their plan administrator to find out if the plan accepts transfers.

One of Wernette’s clients, an 84-year-old owner and sole employee of a law practice, didn’t need the RMD from his 401(k) profit-sharing plan for living expenses. He was able to contribute to the plan and deduct as much as he was required to pull out by the RMD. “The tax impact was a net zero,” says Wernette. However, he adds, “This is not going to work for the average employee.”
Often, “We end up really having a fairly dynamic conversation with a client because of all the possibilities they may have,” says Wernette. “People have options, and part of our job is to put those options on the table.”

Strategizing early is also important, say retirement specialists. “When you’re working, the last thing you’re thinking about is RMDs,” says Bruno, but that’s when the most options are available. During this time, investors can channel deferrals into a variety of account types—taxable, tax-deferred retirement and Roth (non-taxable retirement)—to ensure the most flexibility during retirement, she says.

With RMDs, “It’s not just how much to take, but from where, in terms of keeping the portfolio balanced,” she says. “You can look to see where you’re overweighted and then just take strategically.” Then there’s the frequently asked question about how to reinvest RMDs.

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According to a 2016 study from Vanguard, IRAs subject to RMDs had a median withdrawal rate of 4% and a median spending rate of 1%. For employer plans subject to RMDs, the median withdrawal rate was 4% and the median spending rate was 0%.

“I always say a mandatory withdrawal doesn’t mean a mandatory spend,” says Bruno.

The correct asset allocation for reinvesting RMDs really depends on an individual’s goals for those dollars, such as legacy planning or to create a reserve for later in life, she says. “But tax efficiency underscores all of it,” she says, “since you’re moving out of that tax-advantaged wrapper and into a taxable account.”

It’s important to be very strategic when considering tax planning opportunities, she says, and that’s where advisors can help. Roth conversions are always an option, but the distribution in the year of the conversion must still be satisfied, she adds.

As for asset allocation ideas, broad market index funds are low cost and very tax efficient, municipal bond funds can be appropriate for high-income earners, and equities—with their higher risk but longer time horizon—could play a greater role in portfolios for investors seeking to pass assets to heirs, she says.

Once RMDs are satisfied, advisors can help clients manage the income tax liability from those distributions. For instance, losses in a taxable account might be able to help offset the income from that RMD, says Bruno, and charitably minded investors can do a qualified charitable distribution (QCD).

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