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Year-end brings a predictable flood of questions about required minimum distributions. Despite being around since the 1980s, Required Minimum Distributions (RMDs) remain one of the most confusing aspects of retirement planning. This week's episode tackles everything you need to know.
Remember when RMDs started at 70½? Those were simpler days. Now the starting age depends on when you were born. Currently, RMDs begin the year you turn 73. In 2033, that shifts to 75.
The calculation itself is straightforward. Take your December 31 balance from the prior year and divide it by a life expectancy factor from IRS tables. At 73, you're withdrawing roughly 3.8% of your account value. By 90, that percentage climbs to just over 8%.
There's one wrinkle: if your spouse is more than 10 years younger, you use a different table that factors in both your ages. This typically results in a smaller required distribution since the IRS assumes a longer combined life expectancy.
The penalty for missing an RMD is harsh: 25% of the amount you should have taken. That's on top of the ordinary income taxes you owe. The IRS offers some grace if you catch the mistake quickly, but it's not worth the risk.
You can defer your first RMD until April 1 of the following year. Almost nobody should do this. It forces you to take two distributions in one year, doubling your taxable income and potentially pushing you into a higher bracket.
One scenario where deferral makes sense is if you retired mid-year and need time to organize finances. Even then, you're better off taking it by December 31.
You have complete flexibility when you take RMDs throughout the year. Many clients wait until December to keep money invested as long as possible. Markets trend higher more years than not, so this strategy typically works.
The more interesting planning opportunity involves withholding. Unlike paycheck withholding, your RMD custodian won't automatically calculate taxes. You specify the withholding percentage.
Here's the strategy many miss: you can withhold your entire annual tax bill from a December RMD, and the IRS treats it as if you paid evenly all year. This avoids estimated payment penalties despite making one lump payment at year end.
For retirees with income from multiple sources (Social Security, pensions, rental properties), this simplifies tax planning significantly. Instead of quarterly estimated payments throughout the year, everything gets withheld from the December RMD.
Qualified charitable distributions (QCDs) allow you to send up to $111,000 (in 2026) directly from an IRA to charity. The distribution counts toward your RMD but doesn't show up as taxable income.
For charitably inclined clients, this is often the most tax-efficient giving strategy available. A $100,000 RMD with a $20,000 QCD means you only take $80,000 personally, reducing your tax bill while supporting causes you care about.
QCDs require direct transfers from your IRA custodian to the charity. You can't take the distribution personally and then write a check. The direct transfer is what makes it tax-free.
Roth accounts don't have RMDs. This creates a powerful planning window between retirement and age 73.
Someone who retires at 60 has 13 years to strategically convert pre-tax retirement accounts to Roth. The goal isn't necessarily converting everything. It's reducing pre-tax balances enough that future RMDs don't force distributions larger than you need for living expenses.
Every year during this window, we evaluate: based on other income and tax brackets, how much makes sense to convert? Done thoughtfully over many years, Roth conversions can significantly reduce lifetime tax bills and create more tax-free wealth for heirs.
CNN's Fear & Greed Index hit "extreme fear" in late November. The trigger? A 5% pullback in the S&P 500 from all-time highs.
Five percent barely qualifies as normal market noise. The average intra-year decline is roughly 14%. We see 5-10% pullbacks multiple times in most years. Labeling this "extreme fear" reveals more about media incentives than market reality.
This overreaction explains why market timing fails so consistently. If a 5% dip triggers extreme fear, what happens during an actual correction? People bail out at exactly the wrong time.
Bitcoin demonstrated similar psychology in reverse. When it hit $100,000, client questions were minimal. Now that it's declined to around $94,000, suddenly everyone wants to discuss whether it's a buying opportunity.
Retail investors might actually be learning. Rather than chasing all-time highs driven by FOMO, many are waiting for pullbacks. That's progress compared to previous crypto cycles.
Three shifts have made private equity more relevant for a broader investor base than ever before.
First, fewer companies are going public. The investable universe of private companies keeps expanding. Businesses that would have gone public 20 years ago now stay private longer.
Second, private investments are becoming more accessible. What was once exclusive to institutional investors and the ultra-wealthy is now available through various structures to mainstream investors.
Third, with public equity valuations near all-time highs and bond yields still rebuilding from historic lows, investors are rethinking diversification strategies.
The difference between great and mediocre private equity managers isn't academic. In public large-cap equity funds, the gap between best and worst performers in any given year might be a few percentage points. Over time, that gap narrows even more.
Private equity is completely different. The performance spread between top quartile and bottom quartile managers can exceed 100 percentage points over a fund's life. Top managers might generate 50-100% returns or higher. Bottom quartile managers might lose 20-30%.
This creates a fundamental challenge: the best managers don't need new capital. They have established partnerships, limited capacity, and more demand than they can accommodate. By the time a private equity opportunity is widely marketed and easily accessible, you're probably not accessing top-tier managers.
We view private equity as a diversification tool, not a home run swing. The goal is accessing investment opportunities unavailable in public markets while accepting the tradeoffs: higher fees, limited liquidity, and significant manager selection risk.
Venture capital gets the headlines. Those early Amazon or Facebook stories make compelling narratives. But venture capital is genuinely finding needles in haystacks. You're investing in pre-revenue businesses with brilliant ideas but no proven models.
Other private equity strategies offer different risk-return profiles: buyouts of mature businesses, secondaries where you buy existing fund positions, co-investments alongside established managers. The private equity landscape is much broader than most people realize.
This might be the most important consideration for most investors. Unlike publicly traded stocks where you have daily liquidity, private investments lock up capital for years.
Depending on the structure, you might not access your capital for 3-7 years or longer. Some vehicles offer quarterly or annual liquidity windows, but you're still constrained compared to selling stocks any trading day.
For someone transitioning to retirement who needs portfolio distributions to fund living expenses, tying up significant assets in illiquid investments might not work. Even for wealthier investors, you need enough liquid assets to handle life's unexpected costs.
We don't view private equity as appropriate for everyone. It requires sufficient liquid assets elsewhere, a long enough time horizon to ride out the lockup period, and comfort with the unique risks involved. When those boxes check, it can enhance portfolio diversification in ways public markets can't replicate.
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