How Market Volatility Affects Required Minimum Distributions

Margaret Giles: Hi, I’m Margaret Giles from Morningstar. The recent round of market volatility has implications for investors who are subject to required minimum distributions from their tax-sheltered accounts. Joining me to discuss that topic is Christine Benz. Christine is Morningstar’s director of personal finance and retirement planning, host of The Long View podcast, and author of the bestselling book How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement.

Thanks for being here, Christine.

Christine Benz: Margaret, it’s great to see you.

Who Is Subject to RMDs in 2025?

Giles: First of all, who is subject to required minimum distributions and for which account types?

Benz: This is something that matters to people who are now age 73 or over. It has been a little bit of a moving target. It was stuck at 70 and a half for many years as the starting RMD age. It moved to 72, 73, and it’s moving out to age 75 in 2033. And the accounts that are subject to RMDs are traditional tax-deferred accounts, IRAs, and company retirement plans, where you haven’t paid any taxes for the most part on the funds in the account. And so when these RMDs hit, the amounts that you have to take out are usually fully taxable.

Can Retirees Lower Their RMDs and Tax Bill in a Down Market?

Giles: Is there any opportunity for retirees to use a market downturn to lower their RMDs, and do lower balances mean they could take less and then potentially have a lower tax bill in 2025?

Benz: It’s a good question. The short answer is not really. Your RMD is effectively cooked as of the year-end of the previous year. So, the RMDs that people are taking out for 2025 depend on whatever their balance was at the end of 2024. Of course, balances were elevated, so RMDs are a little high for 2025. If the market stays down for 2025, then people will see that reflected in the amounts that they have to take out for 2026. There’s a little bit of a lag effect. There’s not as much opportunity to add some art to when you take out your RMDs, as you might hope.

Will Congress Waive RMDs After the Market Selloff?

Giles: That’s excellent to know. In previous market selloffs, though, Congress has waived RMDs. Is that a possibility this year?

Benz: Probably not. We did see it in 2020, with the pandemic starting out. That was in March 2020, it was late March. Congress passed the Cares Act that did waive RMDs for that year. The problem was that people had already begun to take their RMDs, so it was a pretty chaotic period. I don’t see Congress wanting to revisit that period, especially because we’re even further into the year today than we were at that time. If it were to happen this time, I would say very likely, if Congress decides to waive RMDs, it would be for the year following the year in which the market had losses. And there’s a precedent for that, too. In the GFC [global financial crisis] in 2008, that was the big down year for stocks, but RMDs were waived for 2009. So, if that were to happen, if we were to have the market fall down and stay down, I would say it would be most likely reflected in 2026 RMDs.

Why It’s Important to Be Mindful About RMDs in a Down Market

Giles: You think retirees should take care about where they turn to for their RMDs, and that’s especially important in down markets. Can you discuss that a little bit?

Benz: Absolutely. I love the idea of retirees who are grumbling about the taxes that they owe on their RMDs. If they can kind of think of it as a way to improve their portfolios. Ideally, you would be pulling your RMDs from securities where it actually helps improve your portfolio or maybe, in the case of right now, where it does the least harm. So if I’m taking an RMD today, I’d probably be wanting to look to my safer parts of my portfolio. If I have cash assets there or if I have bond assets, I would potentially pull from those. And the idea is that you don’t want to pull from your equity assets when they’re down a little bit. So, I would be leaving them undisturbed. In other market environments like 2023 and 2024—great equity market—I probably would want to be harvesting appreciated equity assets to meet my RMDs. So, I’m taking some risk out of my portfolio, and I’m meeting my RMDs.

Strategies for Taking RMDs ‘In Kind’

Giles: I like that idea of combining the portfolio maintenance with your RMDs. You’ve written about taking RMDs in kind. Can you discuss that strategy and who it might be best for?

Benz: Right. This is kind of a wonky thing, but the idea is that if you have securities in your portfolio, usually individual stocks where you want to maintain exposure to them, so maybe you have securities that you think are really inexpensive for whatever reason, you want to maintain exposure in your portfolio, you could do what’s called a transfer in kind to a taxable brokerage account. So, you could meet your RMD by taking out that chunk of your portfolio. You’re maintaining economic exposure. And the beauty of that strategy is that action resets your cost basis to whatever they are at the time that you make the sale and repurchase. And then, if for whatever reason the security really takes off after that, you’ll owe capital gains tax, which, of course, is lower than the ordinary income tax that you would owe on the distributions from your traditional tax-deferred accounts. It’s especially, I think, opportune for people who think that they have very cheap securities, they need to meet their RMDs, and they want to hang on to that security because they think it’s good and cheap and likely to have a recovery.

Giles: Something to keep in mind in down markets. Well, Christine, thanks for being here. I really appreciate it.

Benz: Margaret, thank you so much.

Giles: I’m Margaret Giles from Morningstar. Thanks for watching.

Watch Should You Tweak Your Withdrawal Rate for 2025? for more from Christine Benz and Margaret Giles.