Sequence of Returns Risk and RMDs: How Forced Distributions Amplify Bear Market Damage

Sequence of returns risk is the danger that a bad run of investment returns early in retirement permanently damages a portfolio — even if long-run average returns are fine. Required minimum distributions make this worse: unlike a retiree who can pause withdrawals during a bear market, RMD takers must sell assets every year regardless of what the market is doing. This guide explains the mechanics, quantifies the damage, and covers five strategies to protect your portfolio.

Why RMDs remove your most important bear-market defense

The standard advice for retirees facing a market crash is to stop discretionary withdrawals and live off cash or other stable assets until prices recover. This is sequence-of-returns management in practice: you avoid crystallizing losses on equity positions by simply not selling them.

RMD takers don't have this option. IRC §401(a)(9) requires a minimum distribution from every traditional IRA and qualified plan every year starting at age 73 (age 75 for those born in 1960 or later).¹ The penalty for missing or underpaying is 25% of the shortfall under SECURE 2.0 — and the IRS calculates your required amount from your prior December 31 account balance, meaning you may owe a distribution based on a value that no longer exists.

The math: forced selling in a down market

Consider a retiree with a $2 million traditional IRA at age 73. The Uniform Lifetime Table divisor at 73 is 26.5, so the RMD is approximately $75,472 — or about 3.8% of the balance.²

In a year when markets decline 25%, that same portfolio is worth approximately $1.5 million. The retiree still owes $75,472 (set from the prior December 31 balance). After satisfying the RMD, the remaining balance is roughly $1.42 million. For the portfolio to recover to the original $2 million, it must now gain approximately 41% — not 33%.

The gap grows at older ages because RMD percentages increase as the divisor shrinks. At 80, the divisor is 20.2 and the required rate is about 5.0% of balance. At 85, it's 6.25%. Every year of delay before implementing a protection strategy increases the exposure.

The 2022 problem: nowhere to hide

The standard response to sequence risk is to hold bonds or stable value as a buffer — sell bonds during equity downturns rather than stocks. In most bear markets, this works: bonds rally when stocks fall (flight to safety).

In 2022, both asset classes declined simultaneously. The S&P 500 fell approximately 18% for the year, while the Bloomberg U.S. Aggregate Bond Index fell approximately 13% — the worst bond year in decades.³ Retirees who relied on the traditional bond buffer faced forced selling of depressed assets across the board. RMD takers had no alternative: the distribution had to happen.

The 2008–2009 period was more conventional but more severe: the S&P 500 lost approximately 57% peak-to-trough before recovering. Retirees who took large RMDs in 2008–2009 based on inflated 2007 account balances suffered permanent portfolio impairment that those who had discretion over their withdrawals could avoid.

Five strategies to reduce sequence-of-returns exposure for RMD takers

1. The cash buffer: pre-fund your RMD

Hold one to two years of projected RMD in cash equivalents — a money market fund, short-term Treasury fund, or FDIC-insured CDs — inside the IRA itself. When markets fall, you take the required distribution from the stable cash position instead of selling equity holdings at a loss.

Mechanics: replenish the cash buffer in years when markets are strong (rebalance by selling equities into the cash layer). In down years, draw the buffer down. This gives you roughly 12–24 months of breathing room without forced equity sales.

Limitation: you must pre-position the cash inside the IRA, and cash drag costs return in good years. The buffer is a form of insurance — it costs something to hold it.

2. In-kind (securities) distributions

An RMD does not have to be taken in cash. Most custodians allow you to distribute shares of stock, ETFs, or mutual funds directly from your IRA to a taxable brokerage account — an "in-kind" distribution. The fair market value of the shares on the distribution date counts as the RMD amount for tax purposes.⁴

The key benefit: you don't sell anything. If your IRA holds 500 shares of an S&P 500 ETF and markets are down 25%, you can transfer those shares in kind to your taxable account. You satisfy your RMD, recognize ordinary income equal to the depressed fair market value, and the shares are now in the taxable account with a cost basis equal to that same depressed value.

When the market recovers, the appreciation from your distribution date forward is taxed at long-term capital gains rates in the taxable account — not ordinary income rates — if you hold the shares more than a year. You've effectively converted some future ordinary income into capital gains while eliminating the forced-selling problem.

Practical note: in-kind transfers work most cleanly for individually held stocks and ETFs. Mutual funds that don't trade on an exchange can be harder to transfer in kind at some custodians. Confirm mechanics with your custodian before the year-end rush.

3. Qualified Charitable Distributions (QCDs)

IRA owners aged 70½ or older can make direct transfers to qualifying charities of up to $111,000 per person in 2026 — and these transfers count toward the RMD while being excluded from adjusted gross income entirely.⁵

In a bear market, QCDs are particularly valuable: the charitable transfer happens directly from the IRA to the charity without a taxable distribution. You still satisfy the RMD. The cash you would have used to meet the RMD obligation stays in your taxable assets. And you avoid recognizing income that would otherwise appear on your Form 1040 — reducing exposure to IRMAA Medicare surcharges and Social Security income taxation.

If your planned charitable giving is $30,000–$100,000 per year, structuring it as QCDs rather than writing checks from a taxable account eliminates the equivalent share of your RMD cash need. For retirees who are charitably inclined, this is the most tax-efficient mitigation available.

4. Asset location: hold stable assets in the Traditional IRA

The assets most vulnerable to forced selling are those that fall the most in a bear market. If your Traditional IRA holds primarily equities, a 25% market drop means a 25% drop in your forced-distribution base. If it holds shorter-duration bonds, stable value funds, or cash equivalents, the same bear market produces a much smaller decline.

One approach specifically for large Traditional IRA balances: hold sufficient stable-value and fixed-income assets in the IRA to cover five or more years of projected RMDs. Hold equities primarily in Roth IRA (no lifetime RMDs, so you never have to sell them on the government's schedule) and taxable accounts (step-up in basis at death).

This is a departure from the accumulation-phase guidance (which puts high-growth assets in tax-advantaged accounts) — but in the distribution phase, the Traditional IRA is being depleted on a mandatory schedule. Protecting the "spend-down bucket" from forced selling during downturns is more important than optimizing for tax-deferred compounding inside that bucket. See our full asset location in retirement guide for the detailed framework.

5. Pre-RMD Roth conversions to reduce future obligation

The most powerful long-term lever is reducing your Traditional IRA balance before RMD age. Every dollar converted from Traditional IRA to Roth IRA in the 60–72 window reduces future mandatory distributions. A retiree who converts $500,000 in the pre-RMD years reduces their annual RMD obligation by approximately $18,868 at age 73 — permanently.

Smaller RMDs mean less forced selling per year, less income stacking into higher brackets, and less IRMAA exposure. They also mean smaller absolute losses in a down market, since the required distribution is a percentage of a smaller base. The 2026 tax brackets (22% at $96,951–$206,700 MFJ) and the IRMAA Tier 1 threshold ($212,000 MFJ for 2026) define the maximum efficient conversion amount for most retirees.⁶

If you've already passed RMD age, Roth conversions still make sense — but the ordering rules require taking your RMD before converting any remaining balance. See our guide to Roth conversions after 73 for the mechanics.

Combining strategies: a protection stack

No single strategy fully eliminates sequence-of-returns exposure for large Traditional IRA holders. The most resilient approach combines several layers:

1. Pre-RMD Roth conversions to reduce the required distribution base before forced distributions begin
2. QCDs to eliminate a portion of the annual distribution as non-taxable charitable giving
3. Cash buffer inside the IRA to fund at least one year of RMD from stable assets
4. Asset location to keep the stable-value assets in the Traditional IRA as the natural spend-down source
5. In-kind distributions as an option when markets are significantly depressed and you want to avoid selling equity positions

The interactions matter. QCDs reduce the portion of your RMD that must come from equity sales. The cash buffer absorbs a year of forced distributions. In-kind transfers handle the remainder without crystallizing losses. Pre-RMD conversions shrink the total obligation over time.

Sources

1. IRS — Retirement Topics: Required Minimum Distributions (RMDs). RMD age rules under SECURE 2.0 (age 73 for born 1951–1959; age 75 for born 1960+); 25% penalty for missed distributions under IRC §4974 as amended by SECURE 2.0 §302.
2. IRS Publication 590-B — Distributions from Individual Retirement Arrangements (IRAs). Uniform Lifetime Table (T.D. 9930): age 73 divisor = 26.5; age 80 divisor = 20.2; age 85 divisor = 16.0. RMD calculated from prior December 31 account balance.
3. Charles Schwab — 2022 Market Review. S&P 500 total return approximately -18.1% for 2022; Bloomberg U.S. Aggregate Bond Index total return approximately -13.0% — the worst calendar year for bonds in decades. Both major asset classes declined simultaneously.
4. IRS Publication 590-B. In-kind distributions: the FMV of property distributed from a traditional IRA is taxable as ordinary income in the year distributed, regardless of whether the property is sold. FMV = closing market price on the date of distribution for publicly traded securities.
5. IRS — Qualified Charitable Distribution (QCD) limits. 2026 QCD limit: $111,000 per individual (indexed annually under IRC §408(d)(8)(F) as amended by SECURE 2.0 §307). QCDs exclude the distribution from gross income and count toward the RMD. Direct-transfer requirement: check must be issued directly to the qualifying charity; DAFs and private foundations do not qualify.
6. IRS Rev. Proc. 2025-32. 2026 tax year brackets and standard deductions. MFJ 22% bracket: $96,951–$206,700; 24% bracket: $206,700–$394,600. 2026 IRMAA Tier 1 single-filer threshold: $106,000 (2024 MAGI lookback, per CMS 2026 fact sheet). All 2026 values verified against IRS Rev. Proc. 2025-32 and CMS 2026 Medicare premium announcement.

Historical market returns (2008–2009, 2022) are approximate and drawn from publicly reported index total returns. Market performance and RMD strategy outcomes vary. Values verified against IRS Publication 590-B and Rev. Proc. 2025-32 for 2026 tax year; consult a tax advisor before implementing any strategy.