Retirement gives you plenty of choices. You can decide when to claim your Social Security, what Medicare coverage to buy, whether you want to travel or stay put, work part-time or relax. One aspect of retirement finances many people think they have no control over is that of required minimum distributions (RMDs), but like everything else, there are some decisions you need to make that could affect your retirement income strategy.
Just as a refresher, an RMD is the annual payout savers must take from all their IRAs and retirement accounts when they turn 70½. The only exception to this rule is the Roth IRA, which lets you avoid these required withdrawals. Even if you don’t need the money, you are required by law to withdraw it. If you miss a distribution, you will pay a harsh penalty of 50% of the distribution you should have taken.
The annual amount you need to withdraw is specific to you. You can determine your RMD by dividing your retirement account balance as of December 31st of the previous year by the life expectancy factor that the IRS sets. You can find a helpful worksheet to guide you through this process on the IRS website. Now, let’s look at the choices you have when taking your withdrawals.
The deadline to take your RMD for the year is December 31st. While you may not want to wait until the last minute and risk forgetting, waiting until year-end could provide the opportunity for increased growth in your account. This growth occurs through the magic of compound interest. By leaving your money in your account for the full year, the full balance has all that extra time to accrue interest, possibly making you a bit more money for the future.
Taking your withdrawal at the beginning of the year might prevent you from gaining that extra compound interest, but if your account is on the smaller side or if your portfolio is quite conservative, the compound interest might not be substantial enough to wait.
By taking your withdrawal early, you don’t have to worry about it throughout the year. If you are planning to convert the funds to a Roth IRA you must withdraw the RMD before the conversion, and you might not want to wait until the last minute to do all the paperwork. And while no one wants to think about their future death, delaying your RMD would leave your heirs with a tight window to withdraw the money if you die late in the year.
If you are worried about selling your assets at the wrong time, taking distributions semiannually, quarterly, or monthly might give you some peace of mind. This strategy helps ensure that you get a range of prices for your assets, never selling at the right or wrong time. This is also a happy medium between the first two options. You still get some of the benefits of compound interest, but you don’t have to wait until the deadline to withdraw. This also helps you build your budget around a regular, scheduled cash flow. If you go with this option, make sure you use your investment provider’s service to stagger the payouts. If you do it manually, you risk not taking the full amount required and facing a penalty.
No one option is glaringly better than the others. You need to make your decision based on what is right for your situation. This is where a retirement professional can help you because even more important than when you take your RMDs is how you take them and what assets you sell first.
Securities offered through TCM Securities, Inc., Member FINRA/SIPC.
Prostatis Group LLC is a registered investment adviser.
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