• Withdrawing money from your retirement portfolio in a down market may negatively affect your nest egg over time, known as the “sequence of returns risk.”
  • If your required minimum distribution is approaching and you don’t need the funds, you may reduce this risk by keeping the money invested.

The deadline is fast approaching for mandatory retirement plan withdrawals, which may force some retirees to sell assets in a down market. But experts say there may be ways to reduce the negative effects.

Required minimum distributions, known as RMDs, are yearly amounts that must be taken from certain retirement accounts, such as 401(k) plans and most individual retirement accounts.

RMDs start when you turn 72, with a deadline of April 1 of the following year for your first withdrawal, and a Dec. 31 due date for future years.

Although it’s been a rough year for the stock market, there’s a steep IRS penalty for missing RMD deadlines — 50% of the amount that should have been withdrawn.  

“This is obviously not the opportune time to sell those assets, because they’re at a loss,” said certified financial planner John Loyd, owner of The Wealth Planner in Fort Worth, Texas.  

As of mid-day Dec. 7, the S&P 500 Index is down more than 17% for 2022, and the Bloomberg U.S. Aggregate bond index has dropped nearly 12% for the year. 

Why you need to manage the ‘sequence of returns risk

Research shows the timing of selling assets and withdrawing funds from your portfolio can be “enormously powerful,” said Anthony Watson, a CFP and founder and president of Thrive Retirement Specialists in Dearborn, Michigan. 

The value of assets when you make withdrawals may significantly shift the size of your nest egg over time, known as the “sequence of returns” risk, and managing that risk is “the crux of retirement planning,” Watson said.

Consider ‘journaling’ to keep your RMD invested

If you don’t need your RMD for immediate living expenses, there are a couple of ways to keep the funds invested, experts say.

One option, known as “journaling,” moves the assets from your retirement account to a brokerage account without selling. “Not a lot of people are aware of it,” Loyd said. 

Like an RMD, journaling still counts as a withdrawal for tax purposes, meaning you’ll receive Form 1099-R to report the transfer as income on your return, he said.

While journaling avoids time out of the market, it’s tricky to gauge the exact dollar amount since market values fluctuate, and you may need a second withdrawal to fully satisfy your RMD, he said.

Plus, most retirees withhold taxes through their RMDs, which isn’t possible when journaling assets, Loyd said. Typically, he uses the second withdrawal for tax withholdings.

Either way, you’ll want to build in enough time to complete both transactions by the deadline because “the IRS is not very lenient when it comes to mistakes,” Loyd said.

Avoid ‘execution risk’ by selling and reinvesting

While journaling keeps assets in the market longer, some advisors prefer to avoid “execution risk” by selling assets, withdrawing the proceeds, and then reinvesting in a brokerage account.

It takes a couple of days for RMD funds to settle, but Watson sees journaling as “overly complicated” and prefers to reinvest the funds immediately after the withdrawal clears.