Down With RMDs? Not So Fast

Special note: This will be our final edition of the Adviser Fund Update! We have lots more content for you to explore in 2023. Click here to subscribe to our other Adviser updates. If you have any feedback or suggestions, please email us anytime at info@adviserinvestments.com. We appreciate your feedback!

If there’s one thing the U.S. Congress is addicted to, it’s tinkering. And a mere three years after introducing sweeping changes for retirement savers in the Secure Act, President Biden has just signed Secure 2.0 into law.

Dozens of programs and their rules and regulations are being affected by the updates to the law; we noted some key points here and will have more coverage to come. Today, we want to focus on just one change: The updates to the rules on required minimum distributions (RMDs).

RMDs are how the IRS finally takes its bite out of all the tax-deferred retirement savings people sock away during their careers in 401(k) and other accounts. A portion of the money must be withdrawn (and taxed as income) each year once the retiree reaches a certain age.

Secure 2.0 makes some big changes to those rules, bumping up the age at which individuals must begin taking their RMDs from 72 to 73 (and further extending it to 75 starting in 2033).

At first blush, this may seem like unmitigated good news. After all, what’s not to like about a lower tax bill? And the longer you wait to take withdrawals, the more time your investments have to grow tax-free.

But we’d add a few caveats to that message of good cheer. Lower taxes today don’t always mean lower taxes overall. First of all, the amount of RMDs you must withdraw is tied to your age: The longer you delay withdrawals, the bigger those withdrawals will have to be when you do begin. Depending on your tax bracket, taking larger RMDs later could affect your Medicare premiums as well.

And, regrettably, the longer you wait, the fewer years you’ll have to take those withdrawals in—meaning your heirs may face larger tax bills down the road. Indeed, changes made in the first version of the Secure Act mean that many people who inherit a tax-deferred account must withdraw all the funds within 10 years of the inheritance, making it harder to avoid a big tax hit.

Converting some of your tax-deferred retirement funds into a Roth IRA account may help mitigate some of these issues. Be sure to talk to your wealth adviser about what’s best for you and your family when it comes to RMDs.

Chart of the Week: Don’t Bail on Bonds

 By Jeff DeMaso, Portfolio Manager

Stocks falling 20% or so in a calendar year isn’t fun, but it’s also something experienced investors expect. Bonds falling 13%? That’s…not what we expect.

Vanguard offers a series of static stock/bond allocation funds in its LifeStrategy series. As you can see below, its most conservative option, LifeStrategy Income (20% stocks and 80% bonds), declined 13.9% last year—steeper than its 10.5% drop in 2008. In 2022, it felt like bonds didn’t live up to their protection promise.

Many who are dismayed by the bond market’s fall in 2022 will point a finger at the Federal Reserve’s interest-rate hikes, but the real culprit is inflation. Rising prices are the enemy of a fixed-income investor, so when inflation goes from muted to the highest level in decades, we shouldn’t be surprised that fixed-income securities have posted their worst performance in a generation.

With inflation trending down and bond funds paying out more income than before, now is not the time to abandon a well-built, balanced portfolio. Stay the course.

Adviser Takeaways

In recent Takeaways, Manager of Financial Planning Andrew Busa broke down Secure 2.0, while Senior Research Analyst Liz Laprade offered insight on what to expect in 2023.

We hope you find these videos engaging and accessible, and please let us know if there are any topics you’d like us to address by sending an email to info@adviserinvestments.com.

About Adviser

Adviser is a full-service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994. Adviser Investments and its subsidiaries have over 5,000 clients across the country and over $8 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868.