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Leveraging RMDs to Strengthen Your Target Portfolio

'Target employees should view Required Minimum Distributions (RMDs) as an opportunity to optimize their portfolio and adjust allocations - turning what could be a tax headache into a window of thoughtful financial management,' says Kevin Landis, representing The Retirement Group, a division of Wealth Enhancement Group.

Planning RMD withdrawals allows Target employees to increase long-term financial stability, reduce tax exposure and adjust assets to changing market conditions while meeting their obligations, 'says Paul Bergeron, a representative of The Retirement Group, a division of Wealth Enhancement Group.

In this article we will discuss:

1. The challenges and opportunities of Required Minimum Distributions for Target investors.

2. How to adjust your portfolio using RMD withdrawals.

3. The tax efficiency benefits of Qualified Charitable Distributions (QCDs) and optimizing RMD timing.

Many Target investors have significant tax obligations associated with Required Minimum Distributions (RMDs). Although taxes are inevitable, RMDs also force investors to pull money from their accounts - even if they're not needed for daily expenses - which can result in unexpected tax bills. And RMD withdrawal rates may be higher than desired. However, RMDs can - with some planning - also be an opportunity to enhance investment portfolios.

RMDs are a tax-deferred account obligation for many - traditional IRAs, SEP and SIMPLE IRAs and inherited IRAs - 25% plus taxes. It was previously 50%, but the Secure 2.0 legislation slashed that penalty to 10% with the possibility of further reduction to 10% or waiver in cases of reasonable error. Meeting RMD deadlines helps avoid penalties and maintain a sound financial plan.

Not seeing RMDs as a financial burden, Target investors can use them to rebalance portfolios, adjust asset allocations and sell assets that no longer support their goals. Integrated into a wider investment strategy, RMDs may be an important component of portfolio management.

Step 1: Set Your Required Minimum Distribution.

Planning for RMDs starts with knowing how much money to withdraw. All tax-deferred IRAs except Roth IRAs are subject to RMDs - This includes traditional IRAs, SEP IRAs and SIMPLE IRAs - and employer-sponsored retirement plans like the 401(k), including Roth 401(k)s (subject to change in 2024 when Roth 401(k)s will no longer require RMDs).

Find your RMD by examining account balances as of December 31 of the prior year. For example, 2024 RMDs would be based on balances as of 2023. Refer to the appropriate RMD table for your situation then. People use the Uniform Lifetime Table but there is a Table for those with a spouse over ten years younger than the primary beneficiary.

One benefit of RMDs for IRAs is withdrawals need not come from each account individually. Or investors can pull out RMD amounts from all IRAs in their name (including SEP and SIMPLE IRAs) in one withdrawal. This flexibility is reflected also in 403(b) accounts. But RMDs from traditional retirement plans like 401(k)s and qualified corporate retirement plans must be withdrawn individually.

Step 2: Assess Your Asset Allocation.

Identify areas of adjustment in your portfolio's asset allocation once you know your RMD amount. Portfolio management tools like Morningstar's portfolio X-Ray show your portfolio composition compared to your target allocation. Where allocations veer off of your intended outcomes, you could use RMDs to trim holdings in overrepresented asset categories.

Recently U.S. stocks have beaten international stocks and bonds, which often tilt portfolios toward domestic equities. When completing RMDs, withdraw from overrepresented stocks or assets you want to reduce to keep the balance without interfering with your investment plan.

Step 3: Select Holdings to Reduce.

After clarifying asset allocation, identify holdings to reduce. Assess your portfolio across sectors and investment styles first. A Morningstar style Box classifying investments by size and style may reveal overvalued stocks.

With recent growth stocks outperforming value stocks, some portfolios may now be excessively invested in growth assets. Also a good time to sell stocks or funds that have appreciated but are more risky or volatile. If any holdings have experienced management changes, fee hikes or other adjustments, they might be good candidates for reduction.

Step 4: Choose how to Use Withdrawn Assets.

How you will divide up RMD proceeds depends on your financial plan. Put these funds towards current expenses or put them in a 'cash bucket' for future needs. For taxable accounts, reinvesting RMDs in long-term investments may maintain target asset allocation. Whenever RMDs are greater than immediate needs, they can be reinvested in a taxable account or if deemed eligible, made as contributions to a traditional or Roth IRA.

For example, Target RMD-eligible investors with earned income could contribute to a Roth IRA. Roth assets are exempt from RMDs and can grow without mandatory withdrawals.

Step 5: Look at Qualified Charitable Distributions (QCDs).

For charitable investors over age 70 1/2, a Qualified Charitable Distribution (QCD) is a good strategy. With QCDs, up to USD 105,000 from an IRA can be given away to charity meeting RMD requirements without increasing taxable income. The increase in standard deductions means that some investors wish to review their deductions, so QCDs may be an asset to achieving charitable goals while remaining tax efficient.

Specific steps must be followed to execute a QCD - Investors should consult IRA custodians who may need to work directly with charities to complete the transfer. Some custodians also let you write IRA checks for charity, but the distribution must go to the charity.

Creating Portfolios with Strategic RMD Strategy.

RMDs applied strategically can help Target investors align withdrawals with asset allocation goals and personal spending needs - all while meeting regulatory requirements.

This approach is especially relevant given current economic conditions in which market volatility has prompted some to rethink their exposure to growth-focused stocks. Growth-oriented assets have posted big gains too - and this may also indicate an opportunity to rebalance toward diversified assets or other sectors.

RMDs also support long-term growth objectives when reinvested properly. For example, putting RMD funds into dividend-paying stocks or conservative bonds could create a future income stream in addition to broader financial goals.

Optimizing RMD Timing

Schedule withdrawals based on market conditions is one way to improve RMD benefits. A 2024 Vanguard study suggests that withdrawing RMDs after market upswings could let investors capture gains while stabilizing investments during downturns. Known as market-sensitive RMD timing, this approach can support tax planning and risk management by leveraging appreciated assets during appropriate market conditions. This strategy requires a tax advisor to help with timing and market assessment.

A Gardening Analogy for RMDs.

Imagine RMDs as seasonally pruned in a well-kept garden. As selective pruning cuts out overgrown branches for balance and growth, RMDs let you adjust parts of your portfolio that are too concentrated or misaligned with your goals. This 'pruning' can limit exposure to higher-risk assets and rebalance you toward steadier investments. RMDs help build a resilient portfolio ready for growth - through thoughtful trimming.

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Sources:

1. Adams, Hayden, and Kathy Cashatt. 'RMD Strategies to Help Ease Your Tax Burden.' Charles Schwab , 15 Jan. 2025, www.schwab.com/learn/story/rmd-strategies-to-help-ease-your-tax-burden .

2. Internal Revenue Service. 'Retirement Topics – Required Minimum Distributions (RMDs).' IRS , www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds .

3. Hnt, Dan. '4 Financially Smart Ways to Take Money Out of Retirement Accounts.' Morgan Stanley , 7 Jan. 2025, www.morganstanley.com/articles/financially-smart-ways-to-use-required-minimum-distributions .

4. Adams, Hayden, and Kathy Cashatt. 'Required Minimum Distributions: What's New in 2025.' Charles Schwab , 15 Jan. 2025, www.schwab.com/learn/story/required-minimum-distributions-what-you-should-know .

5. 'How Required Minimum Distributions Impact Your Traditional IRA Balance.' Investopedia , 22 Nov. 2024, www.investopedia.com/required-minimum-distributions-for-iras-8742766 .

What are the key benefits provided by Target Corporation's Personal Pension Account and Traditional Plan for employees approaching retirement, and how do these plans ensure financial security during retirement years? Understanding the synergy between these two plans is essential for retirees, as they work together alongside Social Security and personal savings to replace a portion of an employee's paycheck after retirement.

Key Benefits of the Personal Pension Account and Traditional Plan: Target Corporation's pension plan includes two components: the Personal Pension Account and the Traditional Plan. These plans work in tandem to replace a portion of an employee's paycheck during retirement. The Personal Pension Account provides pay credits and interest that accumulate over time, while the Traditional Plan uses a final average pay formula. Together with Social Security and personal savings, these plans help ensure financial security in retirement(Target Corporation_Dece…).

How can employees elect different payment options, such as the Single Life Annuity or the Joint and Survivor Annuities, within Target Corporation's pension plans? It is crucial for employees to grasp not only the financial implications of these choices but also the necessary spousal consent required when designating a joint annuitant, particularly if the chosen joint annuitant is not the employee's spouse.

Payment Options and Spousal Consent: Employees can elect different payment options, including the Single Life Annuity, which provides the highest monthly benefit and ceases at the retiree’s death, or the Joint and Survivor Annuity, which continues payments to a surviving spouse. To elect a non-spouse as a joint annuitant, spousal consent is required, and this must be notarized to ensure compliance with plan rules(Target Corporation_Dece…).

In what circumstances might benefits not be paid under the Traditional Plan, and what steps can employees take to ensure they remain eligible for their pension benefits upon termination of employment? Target Corporation's policy outlines several scenarios where benefits could be denied, making it necessary for employees to be proactive in understanding their rights and responsibilities concerning plan participation.

Circumstances for Denial of Benefits under the Traditional Plan: Benefits under the Traditional Plan may not be paid if an employee leaves before becoming vested (less than three years of service). Employees should ensure they meet the vesting requirements and maintain eligibility by avoiding termination before they reach the minimum service period(Target Corporation_Dece…).

What procedures should employees follow to report changes in marital status, address, or beneficiaries to ensure compliance with the requirements of Target Corporation's pension plan? Employees must understand the importance of timely reporting these changes to avoid potential issues with their retirement benefits and ensure that their pension plan information remains up-to-date.

Reporting Changes in Marital Status or Beneficiaries: Employees must promptly report changes in marital status, address, or beneficiaries to Target's Benefits Center to ensure their pension records remain up-to-date. Failing to do so can lead to delays or issues in processing pension benefits(Target Corporation_Dece…).

How does Target Corporation determine the final average pay used to calculate retirement benefits under its pension plans, and what factors may affect this calculation? Employees nearing retirement should be fully informed about how their compensation is considered in determining their pension benefits, including aspects such as bonuses and overtime that may influence their final average pay calculation.

Final Average Pay Calculation: Target Corporation calculates final average pay based on the five highest years of earnings out of the last 10 years of service. This includes regular pay, overtime, bonuses, and commissions but excludes items like workers' compensation or long-term disability payments(Target Corporation_Dece…).

How can employees begin the process of rolling over their Target 401(k) accounts into the Pension Plan, and what advantages does this Pension Purchase Program offer? Understanding this rollover option is vital for maximizing retirement benefits, as it can provide employees with a stable income stream while avoiding unnecessary fees typically associated with purchasing annuities outside the plan.

Rolling Over 401(k) into the Pension Plan: Employees can roll over their 401(k) accounts into the Pension Plan using the Pension Purchase Program. This option offers several advantages, including avoiding fees associated with purchasing annuities outside the plan and receiving a stable income stream during retirement(Target Corporation_Dece…).

What are the implications of a participant's age and joint annuitant's age on the payment amounts under the various Joint and Survivor Annuity options at Target Corporation? Employees should be aware of how age differences can impact their pension payouts, as the specific percentages payable under these options may vary based on the ages of both the participant and their designated joint annuitant.

Effect of Participant and Joint Annuitant’s Age on Payments: The Joint and Survivor Annuity options are influenced by the ages of both the participant and the joint annuitant. The younger the joint annuitant, the lower the monthly payout due to actuarial adjustments. Employees should consider these factors when selecting an annuity option(Target Corporation_Dece…).

How are retirement benefits managed during potential plan terminations or amendments at Target Corporation, and what protections are in place for employees in these scenarios? Employees should be well-informed regarding their rights in the event of changes to the pension plan, including how benefits would be distributed and under what circumstances they may remain fully vested.

Plan Terminations or Amendments: In case of plan terminations or amendments, vested benefits are protected, and employees will receive their earned pension. If the plan is amended or terminated, Target ensures that vested benefits are distributed according to the plan's terms(Target Corporation_Dece…).

For employees retiring or leaving Target Corporation, what options are available with respect to unused vacation time and how might this be factored into pension calculations? Understanding how accrued time off translates into benefits could have a significant impact on an employee's financial positioning upon retirement.

Unused Vacation Time and Pension Calculations: Unused vacation time does not directly affect pension benefits but can be included in eligible earnings calculations that determine final average pay. Employees nearing retirement should consult with Target’s Benefits Center to understand how unused time may impact their overall benefits(Target Corporation_Dece…).

How can employees contact Target Corporation for assistance with their retirement benefits to address any questions or concerns they may have about their pension plans? Accessing the right resources and support is essential for employees to navigate their retirement benefits effectively. They can reach out to the Target Benefits Center at 800-828-5850 for more specific inquiries related to their personal circumstances. These questions aim to enhance employees' understanding of their retirement benefits, ensuring they are well-prepared for their transition into retirement.

Contacting Target for Pension Assistance: Employees can contact the Target Benefits Center at 800-828-5850 for assistance with their retirement and pension plans. This center provides support with any questions related to pension options, payments, and administrative requirements(Target Corporation_Dece…).

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For more information you can reach the plan administrator for Target at 10 South Dearborn Street 48th Floor Chicago, IL 60603; or by calling them at 1-800-440-0680.