Julie Jason's Your Money: New Fidelity offering could help solve IRA withdrawal puzzleBy JULIE JASON July 14. 2017 10:42PM
If you ask retirees about their individual retirement accounts (IRAs), they might tell you that life gets complicated when you hit age 70½. The shelter of tax deferral is no longer sacrosanct. Tax laws require mandatory withdrawals (required minimum distributions, or RMDs), and those withdrawals are subject to income taxes. Plus, noncompliance leads to high tax penalties.
So, retirees have to face two important questions: 1) how to calculate those RMDs and 2) how the IRA should be invested after age 70½, knowing that every year, RMDs must be taken.
To solve the puzzle with a single product offering, Fidelity announced last month the launch of Fidelity Simplicity RMD Funds as "industry-first mutual funds to simplify [the] RMD process."
The offering is designed to "take the guesswork out of determining a suitable allocation for assets that are subject to RMDs."
From my perspective (as a lawyer and personal money manager), the innovation here is the combination of asset allocation with actual withdrawals.
One of the offerings within Fidelity Simplicity RMD Funds, for example, is a fund that "seeks total return until its horizon date through a combination of current income and capital growth. Thereafter, the fund's objective will be to seek high current income and, as a secondary objective, capital appreciation," quoting from the prospectus. And, importantly: The fund invests in a way to "achieve the fund's investment objective consistent with a payment strategy to be administered through a complementary systematic withdrawal plan." (You can direct RMDs be made on a schedule, such as monthly.)
According to Ken Hevert, senior vice president of retirement at Fidelity Investments, "Once the RMD has been made, investors find themselves unsure of whether or not they are being too conservative or too aggressive with the remaining investments."
That's a point well taken.
In this case, the fund is managed "according to a 'neutral' asset allocation strategy shown in the 'glide path' ... that becomes increasingly conservative until it reaches an allocation similar to that of the Fidelity Simplicity RMD Income Fund (approximately 17 percent in domestic equity funds, 7 percent in international equity funds, 46 percent in bond funds, and 30 percent in short-term funds (approximately 10 to 20 years after the year 2020))."
According to Andrew Dierdorf, portfolio manager on Fidelity's target date team, including Fidelity Simplicity RMD Funds, the glide path is the key. That's interesting - and possibly worth researching further if you are in the market for a retirement product.
"The foundation of the funds is the glide path, built to balance investment returns and risk in conjunction with an RMD," said Dierdorf. "The glide path for the Simplicity RMD Funds has been designed to provide appropriate portfolio diversification over time, while recognizing the unique needs and time horizon for investors who begin taking RMDs at age 70½."
This is an interesting offering for people who might want help with both asset allocation and calculating RMDs. Of course, other fund families and brokerage firms can provide automatic withdrawals and help with RMD calculations. And other funds offer target date funds. This offering, according to Fidelity, is the first of its kind.
One final point: If you think RMDs are not a big issue for retirees, consider this: According to Fidelity, "it's clear many investors continue to leave themselves vulnerable to significant tax penalties when their withdrawals are not made in a timely fashion." According to Fidelity data, 43 percent of the company's investors eligible to take their first RMD from their IRAs in 2016 had not yet taken the full amount by Dec. 23, 2016. Of those, 40 percent had not taken any RMD by Dec. 23, 2016.
"Retirees often struggle to understand when, which assets, what amount and how to take the annually mandated withdrawal from their tax-deferred retirement accounts," said Hevert. "If not done correctly, investors may experience a 50 percent tax penalty on any amount not withdrawn by the annual deadline."
By the way, when I write about a product like this, I have no financial or other incentive.
Julie Jason, JD, LLM, a personal money manager at Jackson, Grant of Stamford, Conn., and award-winning author, welcomes questions and comments to firstname.lastname@example.org.