Managing RMDs During a Down Market

September 15, 2022
Taking RMDs when asset prices are depressed can hurt. Consider these options for lessening the blow.

Please note: This article may contain outdated information about RMDs and retirement accounts due to the SECURE Act 2.0, a law governing retirement savings (e.g., the age at which individuals must begin taking required minimum distributions (RMDs) from their retirement account will change from 72 to 73 beginning January 1, 2023). For more information about the SECURE Act 2.0, please read this article or speak with your financial consultant. (0123-3U8P)  

Please note: This article may contain outdated information about RMDs and retirement accounts due to the SECURE Act 2.0, a law governing retirement savings (e.g., the age at which individuals must begin taking required minimum distributions (RMDs) from their retirement account will change from 72 to 73 beginning January 1, 2023). For more information about the SECURE Act 2.0, please read this article or speak with your financial consultant. (0123-3U8P)  

This year's market troubles have fallen particularly hard on investors who have started taking required minimum distributions (RMDs) from their tax-deferred retirement accounts.

The IRS requires that retirees calculate these minimum annual withdrawals using their account balances as of Dec. 31 of the prior year. In a cruel twist, Dec. 31 of 2021 came just a few days before the S&P 500® Index touched its all-time high—and then started a months-long tumble into a bear market. As a result, some retirees may have to hit RMD targets based on peak portfolio values by selling assets whose prices have since dropped.

This kind of crunch is one of the reasons why Congress suspended RMDs in 2009 and 2020, but no such respites are available this year. And the penalties for skipping an RMD are stiff: 50% of the amount you failed to withdraw.

So, what can retirees with depressed portfolios do if their RMDs are larger than they'd like? Here are some ideas.

If you need the RMD funds to cover current spending…

The cash from RMDs, along with Social Security and other funding sources, may be part of your income strategy, in which case your goal should be to do as little harm to your portfolio as possible.

Tap Cash Balances

One way to minimize the hit of selling assets at depressed prices is by tapping any cash holdings in your tax-deferred accounts—potentially even if they're spread across multiple accounts. For example, if you have multiple IRAs (including SEP or SIMPLE IRAs), you will have to calculate your RMD for each IRA separately, but then you have the flexibility to take your total RMD amount from either a single IRA or a combination of IRAs. (However, RMDs from Qualified Retirement Plans such as 401(k)s must also be calculated separately, and can only be taken from their respective accounts.1) Of course, you would still have to rebalance back to your long-term allocation after that.

​​​​​​​Withdraw and rebalance

Rebalancing your portfolio by selling overweight positions and buying underweight ones in line with your target asset allocation can be a disciplined way to raise cash and keep your portfolio working toward your long-term goals.

Consider this very simple hypothetical example: A 73-year-old investor ended 2021 with a $500,000 portfolio and a target allocation of 60% stocks, 35% bonds, and 5% cash investments. After this year's turbulence, the stock portion of his portfolio was down $75,000:

The example is hypothetical and provided for illustrative purposes only.

At the same time, the investor needs to $18,868 from his investment portfolio to cover his RMD. (Lean more about calculating RMDs here.) To figure out what to sell to meet his cash need, the investor should:

1. Subtract his cash need from his current portfolio balance:

Current portfolio balance: $425,000

RMD withdrawal: –$18,868

New portfolio balance: $406,132

2. Use his new portfolio balance and target allocation percentages to determine his target dollar amounts for stocks, bonds, and cash investments. As you can see, our hypothetical investor actually needs to buy more stocks—presumably at lower prices, which should work in his favor should the market turn around.

The investor would need to buy $18,679 of stock, and sell $32,854 of bonds and $4,693 of cash investments, giving him $18,868 for his RMD.

The example is hypothetical and provided for illustrative purposes only.

Take out the trash

Once you've figured out which asset classes to sell, it's time to identify individual investments to offload. The place to start is holdings with weak prospects or that no longer match your goals. In short: if you wouldn't consider buying more of a particular investment today, then you should seriously consider selling it.

  • To assess the merits of an exchange-traded fund or a mutual fund, check that its investment strategy still matches your goals and complements your long-term strategic asset allocation. You could also check its recent performance to determine whether it's time to consider shopping for a replacement fund to play the role you've assigned it.

You can use a fund's Schwab-generated report card to assess its strategy, performance, and more. Log in to and click on a particular fund. Near the top of the overview page you can find the report card within the dropdown menu under Fund Documents.

  • To assess the merits of an individual stock, check out the underlying company's earnings and balance sheet for signs of weakness—or use Schwab Equity Ratings® to get a sense of a stock's prospects. Don't be sentimental. Even if a stock has performed well for you in the past, that doesn't mean it will continue to do so in the future.

For Schwab Equity Ratings, log in to and click on a particular stock. On the right side of the stock's overview page, you'll see a Ratings dropdown, where you can click on the Schwab Equity Ratings Report®.

If you don't need the RMD funds to pay for current spending…

You may be in the lucky position of not having to rely on your entire RMD to fund your income plan, in which case you have more options for potentially offsetting some of the losses suffered when you cashed out.

Top off your short-term reserve

Regardless of market conditions, we recommend holding the equivalent of a least a year's worth of anticipated withdrawals in cash investments—such as checking or savings accounts, money market funds or certificates of deposit (CDs)—with another two to four years' worth in relatively liquid, conservative investments such as short-term Treasuries and other high-quality bonds or short-term bond funds. A four-year cushion should be enough to help you manage your risk in most bear markets. If your reserve needs topping up, consider earmarking any unused RMD funds for this purpose.

Give to charity using a QCD

If charitable giving is part of your financial plan, a qualified charitable distribution (QCD) can further your philanthropic goals and help reduce the tax hit from the RMD. QCDs allow individuals age 70½ and older to make tax-free donations of up to $100,000 a year directly from an IRA to a qualified charity, thereby satisfying all or part of their annual RMDs.

Reinvest in a taxable brokerage account

You could also just place any unused funds in your brokerage account in the hope of making up for any lost gains. There's no up-front tax break, and capital gains are taxed the year you recognize them. But if you hold assets for more than a year, you may qualify for a lower long-term capital gains tax rate. Tax-efficient investments (like certain municipal bonds) may also offer tax benefits. Losses may be deductible. And the IRS won't restrict contributions, withdrawals, or how you spend the money.

Do an "in-kind" transfer of securities

Those who simply don't want to part with an investment, whether for emotional reasons or because they want hold onto it until recovers, could consider transferring securities from their tax-deferred account to a taxable brokerage account. You would still be taxed on the value of the distribution, with the securities' cost basis determined by the date of transfer.

Bottom line

Retirees who have hit RMD age might be feeling squeezed this year. But with some flexibility and creativity, it may be possible to cushion the blow of a bad market.

1With the exception of having multiple 403(b)s. Each 403(b) is calculated separately, but the total RMD can be distributed from one or a combination of 403(b)s.

Find your Required Minimum Distribution.

Congress Passes Major Boost to Retirement Savings

Among other provisions, the SECURE Act 2.0 will raise the age at which individuals must begin taking required minimum distributions (RMDs) from their retirement account to 73, beginning in January 2023.

Reducing RMDs With QCDs

A QCD can be a great way to reduce RMDs and optimize the tax benefits of giving.

Build Tax-Free Savings Using Roth Conversions

Periodically converting a portion of your retirement savings into Roth assets can give you a flexible source of income and help lower the taxes you pay over time.

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