3 RMD Timing Moves That Could Boost Retirement Income
Even if your retirement is still decades off, try out this thought experiment: Imagine you’re retired, and you’re told that you must take money out of your retirement investment account every year – even if you don’t need it yet. Also, imagine that the only choice you do have is when you can make your withdrawal.
Essentially, that’s what happens with required minimum distributions (RMDs).
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RMDs are mandatory withdrawals from certain retirement accounts (like 401(k)s and traditional IRAs). Once you reach a certain age (currently 73 for most people, with a future increase to 75 for younger retirees), the government requires you to take a set amount out each year so these tax-deferred savings eventually get taxed.
A key detail here is that while the amount of the withdrawal is calculated each year based on your account balance and IRS formulas, the timing is not -- and that timing can impact how long your retirement savings last.
According to a Morningstar analysis published by AP News, when withdrawals happen during the year can influence just how much money stays invested, how much money benefits from compounding, and just how exposed the account is to market movement. Moreover, there are three money moves you can make with regards to this timing that can help your savings last longer.
1. Wait Until the End of the Year
Waiting until year-end is a delay that allows your money to stay invested longer, which then gives it more time to compound inside its tax-deferred account before it’s finally removed.
Analysis from Morningstar has shown that if markets rise during the year, this delay can yield a slightly higher balance because more money remains invested for longer.
This can be a risky move, though. If markets fall before the withdrawal, the required amount is thus taken from a smaller balance; further, because the deadline date is fixed, there is no ability to adjust once the year is over.
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2. Take the Money as Soon as Possible
Conversely, you could take the full withdrawal right at the start of the year.
This move eliminates uncertainty. The required withdrawal for the year is taken immediately – there is no risk of missing deadlines, and planning is simpler for the rest of the year. This can also make Roth conversion planning easier later on.
However, once this money is withdrawn, it no longer benefits from tax-deferred growth. If, say, the markets rise later in the year, your money will not benefit.
3. Spread It Out Throughout the Year
This approach to RMDs breaks the withdrawal into smaller payments across the year. This can be done monthly, quarterly or semiannually. Doing so allows you to spread your withdrawals across different market conditions rather than relying upon a single moment in time. This reduces the impact of bad withdrawal timing.
This move also creates a steady cash flow similar to income, which can make budgeting easier. There is a trade-off, though: Some tax-deferred compounding is lost when not waiting until the end of the year, since money is leaving your account earlier.
The Bottom Line
There is no absolutely flawless strategy for withdrawing RMDs, as each of the above options feature trade-offs with regards to timing risk, certainty and growth. That said, the bottom line is relatively simple: Even when the rules are fixed, the timing choices around them can still change your long-term retirement outcome.
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This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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