When you turn 70½, the IRS requires that you withdraw a minimum amount from your retirement account(s) each year in what’s called a required minimum distribution, or RMD.
It’s important to take your RMD, even if you don’t need the money, because if you don’t, you’ll face a steep penalty of 50% of the amount you should have withdrawn.
But what’s the best way to take your RMD? Should you take the money out now or later in the year? And what should you do with the money?
These are some of the questions we’ve been answering for investors who’ve set up a retirement consultation with us. (If you want to talk with one of our experienced advisors about your retirement goals and concerns, click here.)
We’ve managed RMDs for our high-net-worth clients for many years, and we can help you with your RMD, too.
Here are some tips to help you get started:
Should I take my RMD in one lump sum or in installments? Early in the year or later?
If you need the cash for your spending needs: You can set up a monthly or quarterly withdrawal through your broker or custodian. To calculate your monthly payout, divide the total required for the year by 12 and use that as your monthly distribution. You’ll need to make sure the cash is available each month or quarter to accommodate the withdrawal.
If you don’t need the cash now: Consider taking your RMD in one lump sum later in the year. This gives you time for extra tax-deferred growth in your account, since the market is often (though not always!) higher at the end of a year than at the start.
How should I raise the cash for the withdrawal?
If you follow NoLoad FundX’s Upgrading approach, you can use a monthly trade to raise cash. When you sold a fund, you’d set aside part of the proceeds for your RMD and then invest the rest in a highly ranked fund. The downside to this method is that your portfolio might be holding less of a highly ranked fund. But it is easier than selling off shares of several funds on a pro-rata basis, and you’ll likely avoid unnecessary transaction costs, too.
What should I do with my RMD?
Just because the IRS requires you to take the money out of your IRA each year does not mean you are required to spend it. When we manage RMDs for our clients, we often will move the money from a client’s IRA and into a taxable investment account, often one that is managed in a very similar, yet tax-efficient way.
How much must I take, and how will it affect the sustainability of my portfolio?
To calculate your distribution, divide your December 31 account balance by your life expectancy, as laid out in the IRS’s RMD worksheet. For the first year, this denominator is 27.4, which works out to 3.65% of your account value, and this is well within the 4% rule of thumb for a sustainable initial withdrawal rate.
The 4% rule assumes you can increase your withdrawals each year by the amount of inflation to support your spending power. If you assume a 3% inflation rate (which is higher than the CPI has been for a number of years) your withdrawal at age 80 would be 5.38%. Using the IRS’s calculator, your RMD at age 80 would be 5.35%— so it’s still pretty close to the “safe” withdrawal rate.
After age 80, however, your RMD amount will start to become a little higher than the “safe” rate of withdrawal. By age 90, for example, your RMD will be 8.77% vs. 7.22% “safe” withdrawal. At that point you may want to consider spending less than the RMD and directing part of your withdrawals to a taxable investment account.
Can I donate my RMD to charity?
If you normally make donations to charitable organizations, a qualified charitable distribution (QCD) may satisfy the RMD for the year in which it is made. Generally, IRA distributions are treated as taxable income but a QCD may be excluded from income if you instruct your IRA custodian to make your distribution directly to the qualifying organization. Make sure to obtain acknowledgement of the contribution from the organization.
Help with your RMD
Here’s the takeaway: taking some time to think through how to best take your RMD can really pay off.
We’ve been managing retirement accounts for high-net-worth clients and corporate retirement plans for nearly 50 years, and we can help you come up with a plan that works for you (this is something we typically only offer to our clients).
Click here to set up a time to talk with an advisor about your RMD.