(PUB) Investing 2015

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Complaining about required minimum distribution
from 401(k)s might seem a little like grousing that the
pool is too crowded in Florida during high season.
It may be a nuisance, but in the scheme of things it’s
a high-class problem to have.
For the majority of retiree households, RMDs are a
nonissue. They’re spending more than they’re required
to from their IRAs, so they don’t need the IRS to
tell them how much they must take out annually. (For
better or for worse, there are no limits on the max-
imum you can take out of your IRAs.)
For affluent retirees, however, RMDs can be un-
welcome, shrinking the amount of assets that can
enjoy tax-deferred compounding while also
potentially forcing higher tax bills in the years they
take the distributions.
There’s no single “RMD season,” but many investors
wait until year-end to take their distributions,
perhaps to take advantage of a few extra months of
tax-deferred compounding or perhaps because of
inertia. With the deadline to take required minimum
distributions fast approaching—Dec. 31—here
are some tips to bear in mind.
1 | Take the right amount at the right time.
Calculating RMDs and taking them on time is fairly
straightforward, but there are a few wrinkles to
bear in mind. The first is one that only first-time RMD-
ers need to bear in mind: Even though Dec. 31 is
the usual RMD deadline and age 70 1/2 is burned into
every IRA holder’s brain, the first RMD deadline is
actually April 1 of the year following the year in which
you turn 70 1/2. So, if you turned 70 1/2 this past
July, you wouldn’t need to take your first RMD until
April 1, 2016. You’d then need to take an RMD
again by Dec. 31, 2016 —and by Dec. 31 in every
year thereafter.
Calculating RMDs, meanwhile, is a matter of dividing
each of your RMD-subject account balances on Dec. 31
of the previous year by your life-expectancy factor.
In the case of RMDs for this year, for example, you’d
look back to your balance at the end of 2014. In
most instances—whether you’re single, your spouse
is within 10 years of your own age, or you have
someone other than your spouse as your sole benefi-
ciary—you’d use the IRS’ Uniform Lifetime table
to calculate your RMD. But if your spouse is at least
10 years younger and also the sole beneficiary of
your RMD-subject account, you’ll use the IRS’ Joint
Life and Last Survivor Expectancy table (Table II in
IRS Publication 590), finding the intersection between
your age and your younger spouse’s age. That
results in a smaller payout than would be the case if
you based your RMD on your life expectancy alone.
It’s also worth noting that you don’t need to take
RMDs from each and every IRA account, assuming
you have multiple. As long as you take the right
total from at least one of the accounts, you’ve met
your distribution requirement. That allows you to
take the RMD from the account(s) where it makes the
most investment sense to do so.
2 | Let your year-end checkup drive what you sell.
Before you actually pull the trigger on your RMDs,
conduct a thorough year-end portfolio review, taking
stock of your asset allocation and the fundamentals
of your holdings, including valuations. Holdings that
look unattractive on a bottom-up basis or that are
simply consuming too large a share of your portfolio
should be at the top of your list when determining
what to sell to meet RMD s. That can serve the dual
goal of improving your portfolio and satisfying the
IRS ’ requirements.
3 | Tie RMDs in with bucketing.
If you’re using the “bucket system” for retirement-
portfolio planning, you can tie RMD s to your buckets
in several ways. Because it’s a good idea to refill
your cash bucket (bucket one) throughout the year,
you can have income distributions from your IRA
holdings sent directly into bucket one as they’re paid
7 Tips for RMD Season
Portfolio Matters | Christine Benz