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Alternatives to Cash Withdrawals to Satisfy RMDs

Financial Planning

Traditional IRAs require minimum distributions (RMDs) beginning at age 72. If this cash is not needed to cover living expenses, below are some alternative strategies to satisfy RMDs and reduce RMDs in future years:

  • Direct Stock Transfer - In many instances, stocks and/or bonds are sold within a retirement account to raise sufficient cash to cover RMDs. Given the recent volatility and downturn in financial markets, 2022 may be an appropriate year to distribute shares of stock instead of cash. This strategy eliminates the potential of selling any positions that are down to cover a cash RMD. Rather, shares are simply transferred directly from the Traditional IRA to the Individual or Joint brokerage account, with the fair market value of the shares transferred equaling the RMD amount. Once transferred into the brokerage account, the cost basis and holding period of those shares resets to the date of the transfer.
  • ROTH IRA Conversions (via Direct Stock Transfer) - Once RMDs have been met, converting additional assets from Traditional IRA to ROTH IRA can be an effective way to reduce future-year RMDs. ROTH IRAs have no RMDs, and any withdrawals in retirement are tax-free. ROTH IRAs are also a preferred asset for a non-spouse to inherit, as those inherited accounts must now be fully withdrawn within ten years, per the SECURE Act. Inherited Traditional IRA withdrawals over those ten years are taxable income, but Inherited ROTH withdrawals are tax-free. Any amount converted from a Traditional IRA to a ROTH IRA is treated as additional taxable income to the owner in that year. Given the recent volatility and downturn in financial markets, 2022 may be an appropriate year to directly transfer shares of stock instead of cash, to eliminate the potential sale of positions that are down to perform the conversion with cash.
  • Qualified Charitable Distribution (QCD) - For those inclined, in lieu of receiving cash, a direct transfer from a retirement account to a qualified charity may also satisfy RMDs. Clients have the option to write checks from a checkbook that is linked directly to their Schwab IRA, made out to the desired charity. This is often a more tax-efficient strategy than receiving the RMD as cash and then choosing to donate. The QCD reduces pre-tax income that would've otherwise been recognized, but a substantial charitable contribution only qualifies as an itemized deduction.

If your RMDs are in excess of what is needed for your lifestyle in retirement, and if you're interested in further exploring alternative strategies, our firm is here to assist.

Disclaimer

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