I’m a retired educator, and I’m just turning 72. I’m about to start taking my required minimum distributions. I don’t need the full amount, but I guess I have to take it anyway. I don’t know when the best time is to take the RMDs. Is it best to take it all at once at the end of the year? Or should I take it monthly throughout the year?
—Carol
Dear Carol,
Congratulations on making it through a career of teaching, and for having saved enough that you don’t need the full amount of your required minimum distributions (RMDs) to live on right now. But the government wants its taxes, so you have to take out the required minimum distribution according to the formula and pay income tax on it every year once you turn 72.
If you don’t take your RMD in time, which is typically Dec. 31, you face a 50% penalty on the amount that’s missing, and that can be pretty steep because you might be taking tens of thousands of dollars. The amount you have to take per year is roughly 4% of the total account at the start, based on an IRS formula that considers your age and amount of assets.
Financial adviser Kenneth Waltzer had a client who forgot to take RMDs on an account he inherited for several years in a row, and by the time he figured it out and went to correct it, the amount owed was over $100,000.
That’s why at the end of the year you see a lot of reminders about taking your RMDs. But that doesn’t mean it’s the best time. In fact, it’s probably the worst time most years, and is especially bad if you run the risk of forgetting.
The best timing for you will depend on the amount of money and what you need it for. There are pros and cons to each, and financial advisers typically see their clients do it one of three ways:
December
When financial advisers say end-of-year for thinking about RMDs, they don’t mean Dec. 31; they mean early December. That’s also the time a lot of advisers are going over accounts anyway, looking at rebalancing portfolios for clients, and taking a last look at tax-loss harvesting, which is when you sell losing positions to offset capital gains.
This year, some retirees might have wanted to wait as long as possible before selling anything in their accounts, because both stocks
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are down significantly. That might seem like a pro in favor of the end of the year, but for RMDs, it really shouldn’t matter.
Because the amount you have to take is based on the balance at the end of Dec. 31 the prior year, the disposition of the markets this year doesn’t change anything. You should already have the amount you have to withdraw moved to cash or cash-equivalents, and leaving it in the account until the deadline or moving it earlier should make little difference.
“A good adviser is not going to be a market timer,” says Amy Miller, a certified financial planner and senior vice president for Wealthspire, based in West Hartford, Conn. “If you need the cash, it’s going to be in cash. You’re giving up the potential of market return, but I think the majority of folks feel better that the cash is there, and they don’t have to touch it if the market is down.”
Monthly
Since you know your RMD amount from the start, it’s easy to break it up into 12 equal distributions that can be automatically deposited into your checking account.
“It helps you budget, and you’ll get it just like you get Social Security or a pension,” says Miller.
The big pro to monthly distributions is that you won’t be tempted by a lump sum of tens of thousands of dollars. If you come across a major expense that you can’t cover with your regular draw, you can always arrange an extra distribution, says Beata Dragovics, a certified financial planner and founder of Freedom Trail Financial based in Boston.
The only real drawback to withdrawing monthly is if you’re investing or donating the amount, and then it’s just more convenient to have it all at once.
January
The sweet spot for RMD withdrawals might just be January for one big reason: It means you have no risk of forgetting.
“It’s a really important thing. It’s a huge reason to make sure that those distributions happen,” says Isaac Bradley, director of financial planning at Homrich Berg, an investment firm based in Atlanta.
Another key reason to take out money in January is that it makes it easier for your heirs if you should pass away during the year. “It can be a nightmare if you pass away and you haven’t taken an RMD for the year,” says Miller. The later in the year, the worse the paperwork crunch for your loved ones.
The potential con that gets most people thinking about December rather than January is that they don’t want to take money out of the account until the last possible moment, in order to catch any market upswing, which is especially true this year.
But that supposes that the money you are withdrawing is invested up until you take it out, and then is sitting in cash afterward. It should actually be the reverse. The money you know you need to withdraw should already be in cash, and then when you take it out, you should reinvest it if you’re not going to spend it soon. You can even transfer it in-kind and not even change your allocation, just move it to a taxable account.
“The one difference is that you might want to invest in tax-preferred investments, like municipal bonds, outside the qualified accounts,” says Bradley.
Got a question about the mechanics of investing, how it fits into your overall financial plan and what strategies can help you make the most out of your money? You can write me at [email protected].
