The best time to take your RMD

As you near the age of 70, you’ll likely be doing a lot of thinking about and discussing required minimum distributions (RMDs). Timing those distributions just right can be tricky, but it’s important to get it right since they can determine how much money you will have to live on during retirement.

Federal law requires you to start taking RMDs at age 73, but you can start taking them earlier. If you start too early, your nest egg could be used up before you pass on. But if you take them too late, you’re leaving money on the table. So, let’s break it down and discuss the best time to start taking RMDs.

The rules

Over the last four years, many changes have gone into effect regarding RMDs and when they’re required, so let’s tackle those first.

First off, RMDs apply to the following employer-sponsored retirement plans: 401(k)s, 403(b)s, and 457(b)s. They also apply to traditional IRAs, SEP IRAs, SARSEP IRAs, and SIMPLE IRAs. As far as Roth plans go, RMD rules apply to Roth 401(k) accounts, but not Roth IRAs.

The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) of 2019 made major changes to the RMD rules, stating that if you reached the age of 70 ½ in 2020 or later, you must take your first RMD by April 1 of the year after you reach 73.

Let’s break that down a bit more. Say your date of birth is January 1, 1951. You would have turned 70 ½ on June 1, 2021, so the new rules apply to you. Since you would turn 73 in 2023, but don’t have to take your first RMD until the year after you turn 73, your first RMD would be due by April 1, 2024.

You’re also required to take your required distribution by December 31 of that same year, so you could potentially have to take two RMDs during the year you turn 73. We’ll talk about that more below.

Life expectancy tables updated this year

To throw another mini complication into the works, life expectancy tables were just updated in January 2022. The new tables reflect smaller RMDs than in the past, which can be good. You’ll be taxed less, and you can potentially stretch your balance further.

Timing is everything

The most important part of timing your RMDs is to make sure you take them by the deadline. If you don’t take your first RMD according to the rules spelled out above, you’ll face a penalty of 50% of the amount you should have taken, but didn’t. In addition, you’ll owe income taxes on the amount.

As mentioned above, you could potentially run into a situation where you’re forced to take two RMDs during the year you turn 73 (one by April and another by the end of December). If you opt to take the initial RMD when you’re 72, you avoid that double-payment situation. It’s worth discussing this option with your tax advisor.

Tax considerations

RMDs represent a loss of control over your income since they could potentially bump you into a higher tax bracket. Timing of the payments is another item to discuss with your tax advisor. Should you take them at the beginning of the year, end of the year, or throughout the year? Let’s go over the pros and cons of all three options.

Option 1: Beginning of the year RMD

Pros:

• You won’t forget to take your distribution, and if you pass away during a given year, it won’t be on your heirs to make it happen in a very tight window.
• If IRA conversion is something you’ve discussed with your tax advisor, taking the RMD early frees you up for that option later.
• If the market drops later in the year, you’ll be selling those units low, and will have less available for distribution. You’re also leaving less at risk to the whims of the stock market.

Cons:

• There might be tax-deferred opportunities you miss out on.

Option 2: End of the year RMD

Pros:

• If the money in your retirement account is earning interest, putting it off until the end of the year gives you more time to earn on those funds staying put in the account. It also gives you more money for the following year to work with.

Cons:

• Just as you have the potential for gaining more by leaving it in the account until the end of the year, you also have the potential for loss. The funds do remain at the mercy of the stock market.
• You flirt with the possibility of not getting the distribution out on time if you wait until the holidays, risking incurring the 50% penalty.
• In the tragic event you die during the year before you take your distribution, it leaves it up to your heirs to work within a small window to get the distribution completed before it’s penalized.

Option 3: Throughout the year

Pros:

• Dividing your distribution up into monthly, quarterly, or semiannually means you’ll never take a large sum out of your account at precisely the wrong time.
• It establishes regular cash flow throughout the year.

Cons:

• If you’re doing the calculations yourself and not relying on your bank to do the calculations, you could miscalculate and take the wrong amounts.

You’re not in this alone

While the decision of when to take your RMDs is ultimately up to you, there are people who can help you weigh your options! We recommend talking with your financial advisor and/or a tax professional about your unique situation, and our experts are always willing to meet with you and discuss RMDs, so don’t hesitate to reach out.