The bull market of 2023 and 2024 has been a boon for retirement accounts, but it presents a unique challenge for clients subject to required minimum distributions (RMDs).
With major market indexes reaching historic highs, many retirees face significantly larger RMD obligations than anticipated. Consider a 75-year-old retiree with a $2 million IRA at the start of 2024. Their 2024 RMD of $81,300 was taken at the end of the year. With a 20% return over 2024, their year-end balance would be $2,318,700, resulting in a 2025 RMD of approximately $97,385—nearly a 20% increase from 2024.
As trusted advisors, we must help clients navigate these increased distribution requirements while optimizing their overall financial strategy.
Here are four critical considerations to address with clients facing higher RMDs in today’s market environment.
1. Cash flow management: Think beyond the distribution
With larger RMDs on the horizon, developing a comprehensive cash flow strategy becomes paramount.
Many clients may see that their required distributions will exceed their actual spending needs. While some clients may be tempted to spend the additional cash being distributed from their retirement accounts, that may not always be the best decision. Just as selling assets during market downturns can effectively turn market fluctuations into locked-in losses, spending those excess RMD funds can potentially harm the client’s long-term financial plan.
It is important to be proactive in these situations, as this presents both a challenge and an opportunity for advisors to add value through thoughtful planning.
The key is to prevent these larger distributions from becoming idle cash that erodes purchasing power over time.
Consider implementing a systematic reinvestment strategy for clients who don’t need the full RMD for living expenses, ensuring that excess funds continue working toward long-term financial goals.
Higher RMDs may also result in a larger tax liability. Clients making estimated payments may need to adjust their quarterly payment amounts, while those withholding directly from RMDs may need to increase their withholding rates from 2024 levels to account for their increased income. By making these changes early in the year, you ensure clients are paying sufficient taxes, rather than letting those excess distributions sit in cash.
Pro tip: Review the distribution strategy for retired clients taking RMDs at the start of every year. For each client, create a specific plan for excess distributions. This might include reinvestment strategies for taxable accounts, gifting opportunities, or earmarking funds for major upcoming expenses.
2. Distribution frequency: The case for monthly withdrawals
While many clients and advisors default to annual RMD withdrawals, monthly distributions often provide superior outcomes in today’s environment.
Monthly distributions offer several advantages: They smooth out market volatility impacts, provide regular income streams that mirror retirement spending patterns, and can help with tax withholding management. Perhaps most important of all, by stretching distributions out over a longer period of time, those funds remain invested and could continue to grow in value.
For clients transitioning from annual to monthly distributions, create a clear timeline and communication strategy. This helps them understand how the shift affects their cash flow and provides opportunities to adjust the distribution strategies throughout the year.
For example, take the case of a client that previously took their RMD as a lump-sum at the start of the year. After calculating the necessary amount they need monthly to cover expenses, they now receive an automatic distribution at the start of every month. At their semi-annual review during the summer, equity markets have reached a new high for the year. At that point, the client can take the remainder of their RMD as a lump sum, when the market is performing well. This provided them with a consistent stream of income throughout the start of the year, and the opportunity to take a larger distribution at any point, helping to maximize portfolio growth in the face of an ever-growing RMD.
Pro tip: When implementing monthly RMDs, establish automated processes to ensure consistent execution and consider dollar-cost averaging benefits in varying market conditions.
3. Qualified Charitable Distributions: A powerful tool
With higher RMDs comes an enhanced opportunity to leverage Qualified Charitable Distributions (QCDs). A QCD is a tax-free distribution made from an IRA directly to a client’s charity of choice. The benefit of donating using a QCD, rather than making cash gifts to charity, is that the QCD can help to satisfy all or a portion of a client’s RMD for the year. This is especially beneficial in years when RMDs may exceed the client’s annual cash flow needs. They will only be taxed on distributions needed to cover their expenses, with the remainder of their RMD being satisfied by a QCD.
In 2025, clients can direct up to $108,000 annually from their IRAs directly to qualified charities, potentially reducing their taxable income while fulfilling their philanthropic goals. QCDs are particularly valuable for people who take the standard deduction because they offer a way to get a tax benefit from charitable giving even without itemizing deductions.
The key to successful QCD implementation is proactive planning. Start discussions early in the year to identify charitable intentions and coordinate their QCDs prior to taking RMDs. This sequencing is crucial because once a client has taken an RMD, they cannot retroactively designate it as a QCD.
Making the QCD first ensures that they can maximize the tax benefit since the charitable distribution counts toward their RMD requirement for the year. This strategy not only fulfills charitable giving goals but can also help to reduce their adjusted gross income, which may lower Medicare premiums, minimize Social Security taxation, and preserve other income-based tax benefits.
Pro tip: Maintain a running QCD tracker for each client, ensuring they maximize their annual allowance while coordinating with their overall charitable giving strategy.
4. Tax planning: Staying ahead of the curve
Larger RMDs can have cascading tax consequences beyond just pushing clients into higher income tax brackets.
As income increases, Medicare’s Income-Related Monthly Adjustment Amount (IRMAA) surcharges also increase, resulting in higher monthly premium payments. Additionally, Social Security benefits become progressively more taxable at higher income levels, meaning a larger portion of a client’s benefits may be subject to taxation.
Given these interconnected tax implications, developing a proactive tax strategy becomes essential for protecting clients from both increased income taxes and these secondary tax effects.
Consider implementing a multi-year tax planning strategy that takes uses several strategies:
- Adjust investment allocations in both taxable and retirement accounts to optimize portfolio growth in the most tax-efficient way. Consider placing growth assets in Roth accounts and avoid income-producing or dividend-paying stocks and bonds in taxable accounts.
- Coordinate Roth conversion and other income-generating planning opportunities in lower-income years.
- Implement tax-loss harvesting strategies during downturns in the market, specific sectors or even individual positions, to offset gains or generate losses to be carried forward.
Looking ahead
As advisors, we must help clients understand that larger RMDs, while potentially challenging from a tax perspective, reflect successful long-term investment growth. By implementing these strategies thoughtfully and maintaining open communication with clients, we can turn these increased distribution requirements into opportunities for comprehensive financial planning.
Remember to regularly review and adjust these strategies as market conditions, tax laws, and client circumstances evolve. Success in managing rising RMDs comes not just from implementing these strategies initially, but from maintaining and adjusting them over time to ensure optimal outcomes for our clients.