CAROLYN T. GEER for the Wall St Journal writes:This is the time of year when many investors shift their focus from building up retirement accounts to drawing them down.
If you're over 70½, you must take a "required minimum distribution" out of your traditional individual retirement account by Dec. 31 of each year. (Those just turning 70½ have until April 1 of the following year.)
After a lifetime of saving and investing, it isn't always easy to reverse course. Many investors, such as Mary Stuhr, a reader in Addison, Ill., are hard-pressed to decide which assets to tap for their required distributions, and struggle with whether and how to reinvest unused amounts.
Ms. Stuhr, for example, wonders whether it's better to take some money from funds that are performing well or the full amount of the distribution from her laggards. "Reinvesting it is also a big decision," she writes, "since I am 75 and want to preserve my capital."
Her dilemma underscores "one of the most important and basic investment moves a retiree should make regularly: rebalancing their portfolio," says Jonathan Guyton, principal of Cornerstone Wealth Advisors in Edina, Minn. It's best to determine the source of your distribution based on your underlying objectives and investment plan, so this is a good time to review where you stand, he says.
T. Rowe Price Group TROW +1.01%suggests people in their 70s and 80s keep 20% of their portfolio in short-term investments (money markets, certificates of deposit, bank accounts, short-term bonds), 40% in fixed income (70% investment-grade bonds, 20% high-yield bonds, 10% international bonds), and 40% in equities (55% large-cap stocks, 30% international stocks, 15% smaller-cap stocks). If that seems like a lot of stocks, remember that your retirement may last several decades, and Social Security is effectively another huge source of fixed income for most retirees.
So, if your plan is to have 40% of your holdings in stock funds and you have more than that now, withdraw from your stock funds to restore your desired mix, or "asset allocation," says Mr. Guyton.
If you have more than one fund in an overweighted category, withdraw from your best performer or performers, he adds. "Doing this—and doing it at least annually—is a great way to follow one of the holy grails of investing: selling high," he says.
When it comes to reinvesting, be sure you first set aside enough assets in a money-market account to cover three to six months of living expenses, advises Christine Fahlund, vice president and senior financial planner at T. Rowe Price. That way, if the stock market is down when you need extra cash for unexpected expenditures, you won't have to sell shares of your stock funds when their prices are low, she says. Once you have your emergency fund in place, replenish it each year as needed.
Beyond that, any part of your distribution you don't need can be reinvested in a taxable brokerage account. It's generally best to keep more stocks in your taxable account than in your IRA, says Mr. Guyton. That's because qualified dividends and long-term capital gains trigger less total income tax (and often no federal tax) there than in your IRA, where gains are subject to often higher ordinary-income tax rates when withdrawn. Just be sure your overall investment mix in the two accounts is in line with your objectives, he says.
Finally, consider using some of your unneeded withdrawal amounts to fund a Roth IRA or to pay the taxes to convert at least some of your regular IRA assets into Roth IRA assets. Once in a Roth IRA, no minimum distributions are required, and any qualified withdrawals will be income-tax free.
Unlike traditional IRAs, which don't allow contributions beyond age 70½, there are no age restrictions on Roth contributions, but you or your spouse must have so-called earned income equal to the amount of the contribution. (Things like investment income and Social Security benefits don't qualify.)
Whether to convert regular IRA assets into Roth assets is a complex decision, because you'll owe ordinary income taxes up front on the portion of the converted amount attributable to your deductible contributions and investment earnings. But converting could prove a valuable "tax-diversification strategy" should tax laws change down the road, says Ms. Fahlund.
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