RETIREMENT
of deposit,” says Nicky Amore, a wealth advisor at Parallel Advisors in Chicago( and also a CFP Board ambassador). These funds prevent clients from being forced to sell assets at“ unfavorable prices,” she explains.
Another strategy is to proactively convert qualified accounts to Roth accounts, she says. Taxes will be due at the conversion, but Roths are exempt from RMDs. The strategy should begin before retirement, she adds, preferably in bear-market or low-income years to reduce the tax bite.
In general, it’ s best to have“ growth
RMDs should be kept in mind when establishing a client’ s asset allocation in the first place, no matter the client’ s age, advisors say.
assets” in Roth accounts and“ incomeproducing or less-volatile assets in traditional pretax accounts,” Amore says, to“ minimize the risk of having highly depreciated assets in pretax accounts at RMD time.”
Whether a client is converting to Roths or taking RMDs, in both instances it’ s a good opportunity for portfolio rebalancing, she says. For instance, if a client’ s equity portfolio has appreciated beyond the target allocation, as defined by the client’ s personalized financial plan,“ it may be appropriate to take RMDs from equities, even if they are temporarily down,” she says.“ Every withdrawal decision should be aligned with the client’ s overall asset allocation strategy and long-term goals.”
In fact, RMDs should be kept in mind when establishing a client’ s asset allocation in the first place, no matter the client’ s age, advisors say. Increasing allocations to fixed-income securities as retirement nears is not just a matter of reducing risk, they say. These securities can be good sources of cash. As bonds mature, the proceeds can be used to cover RMDs, says Peter Halbrook of Triton- Point Wealth in Chevy Chase, Md. This, he adds, is“ a major benefit to owning individual bonds in lieu of a bond fund.”
Clients who have a sufficient allocation to fixed income and cash-equivalents like CDs can take required
distributions regardless of market volatility, he says, since these securities typically hold their value. Some advisors even recommend moving equity assets that have retained their value to fixed income or cash positions ahead of RMDs, to prepare for taking the distributions without having to sell depressed assets in a market downturn.
“ We may opt to strategically raise cash in stages throughout the year,” says Robert Waskiewicz of Wescott Financial Advisory Group in Philadelphia, to“ protect against liquidating large amounts during negative periods.”
Liquidating less-volatile assets for RMDs( or any other cash needs) allows the client’ s equity allocations to stay invested and recover from market downturns, he says.
Trading Out
Yet another strategy for some clients is RMD“ transfers in-kind.” This option allows clients to fulfill their RMD obligation by transferring investments directly from a retirement account to a taxable brokerage account, without needing to sell them first. Taxes are still due on the value of the transferred assets, but experts say this strategy is beneficial for clients who don’ t need the cash and want to maintain their investment holdings.
During periods of“ market weakness,” says Todd Moser, president of NorthRock Partners in Palatine, Ill., inkind transfers allow clients to repurchase the securities at depressed values and retain“ the potential for recovery and future growth,” without locking in the losses.“ This is a recommended approach for clients who have sufficient liquidity outside their retirement accounts, are comfortable holding those assets long term, have an RMD that is greater than their cash-flow needs and whose portfolios are well-aligned with their risk tolerance and goals,” he says.
Other clients may prefer to satisfy RMD requirements by making qualified charitable distributions( QCDs), says Jennifer Pagliara Horton at CapWealth in Franklin, Tenn. Such distributions allow those age 70½ or older to give all or part of their RMDs directly from an IRA to 501( c)( 3) charities and“ avoid paying income tax on that distribution,” she says. Qualified charitable distributions are currently capped at $ 108,000 annually per person.
In any case, whichever approach suits your clients best, it’ s important to understand the distribution options, review current and future tax rates and coordinate RMDs with a client’ s broader financial plan. The penalty for failing to take the required minimum distribution, she cautions, is 25 % of“ whatever you did not take out” plus any income taxes owed on that amount.
The penalty may be reduced, however, or even waived entirely if you take prompt action.“ I would advise not to wait until the last minute,” she says.
46 | FINANCIAL ADVISOR MAGAZINE | JUNE 2025 WWW. FA-MAG. COM