How to Tap A Jumble of 401(k)s and IRAs
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Q: I've worked for many employers and now have a menu of 401(k)s, 403(b)s, IRAs, and 457(b)s. When I turn 70 1/2, I'll have to start taking required distributions. Does the I.R.S. care if I take the money from each account, or can I tap it from the worst performers so long as my overall withdrawals equal the total required amount? — Wayne Bromfield
A: As if required minimum distributions, a.k.a. RMD, weren’t confusing enough, the Internal Revenue Service does indeed have some stipulations about how you go about taking your mandatory withdrawals each year.
To put it simply, you have to calculate and withdraw the appropriate amount from each type of account. When dealing with an alphabet soup of different tax-advantaged retirement account types, “you can’t mix and match," says Melinda Kibler, an Enrolled Agent and Certified Financial Planner with Palisades Hudson Financial Group in Fort Lauderdale, Fla.
The Complicated Truth
Making things more confusing, different types of accounts have different rules for RMDs.
For instance, if you own several individual retirement accounts, you can take all of those required distributions from a single IRA. The same goes for 403(b) savings plans, which are offered to many teachers and non-profit workers, says Kibler.
However, if you have more than one 401(k) or multiple 457(b) retirement accounts (used by many municipal employees), you will need to take the appropriate required minimum withdrawal from each and every account.
Depending on how many accounts you have, calculating and taking the right withdrawals from the right accounts can be a real hassle.
That said, you want to make sure you get it right. If you neglect to cash out the right amount each year, you’ll be taxed at 50% on the amount you failed to withdraw.
How to Make Things Simpler
“If you can combine accounts, you should,” says Kibler, who adds that consolidating accounts before RMDs kick in — for instance by rolling over existing 401(k)s into an IRA after you leave an old employer — has other benefits. Namely, it’s easier to keep tabs on your asset allocation and rebalance when appropriate.
Once you’ve pared down your plans, you should also look at structuring your investments to account for these distributions. “For example, many people like to keep some short-term bonds or cash on hand [in these accounts] to minimize the investment impact of these distributions,” she says.
What about selling your worst performers to cover your distributions?
It’s one thing if you had planned to sell the security anyway, says Kibler, but don’t sell your laggards indiscriminately.
“Typically you want to sell your best performers and rebalance your portfolio,” she says. “If you sell your worst performers, you’re doing just the opposite of what you want to do, which is to sell high and buy low.”