When it Comes to RMDs, Timing Matters
Many people believe it’s better to take their required minimum distribution (RMD) at the end of the year in order to maximize tax-deferred growth within their accounts. While on the surface this makes sense, there are several reasons why it may be more beneficial to take your RMD early in the year.
#1 – To minimize an unanticipated market drop
If you wait until the end of the year to take your RMD, you may end up having to sell investments at a loss, which can be detrimental to your portfolio over time. Instead of waiting and taking a single RMD, consider taking smaller RMD payments throughout the year using investment dividends and interest, making you less dependent on market fluctuations.
#2 – To maximize your gifting
If you plan to use your RMD as a gift to a loved one or donation to a charitable organization, a distribution early in the year will allow you to put the money to work sooner. Your family member or favored organization will be glad not to have to wait until the end of the year to receive your gift.
#3 – To avoid the end-of-year rush
Custodians often receive a rush of RMD requests right at the end of the year, which can sometimes create a processing backlog. If your custodian is unable to issue your RMD due to an oversight or a processing delay, you will likely face logistical hassles and may even be responsible for paying a 50% penalty for not taking your RMD in that calendar year. Requesting your RMD early in the year will allow you to avoid this rush and provide you with time to make any necessary adjustments if something is processed incorrectly.
#4 – To prevent a headache for your beneficiaries
Should you pass away unexpectedly during the year without having taken your RMD, your beneficiaries will be responsible for the distribution. Not only will they need to navigate this complicated financial process while grieving but the RMD will increase their income tax liability in the year it is taken. In addition, if you pass away later in the year, there may not be enough time to establish an inherited IRA and initiate the RMD. That could mean additional complications and IRS penalties for your loved ones.
#5 – To streamline a rollover or Roth conversion
If you plan to initiate a rollover or Roth conversion during the year, you’ll probably want to request your RMD before doing so. Because the IRS qualifies the first withdrawal of the year as your RMD, if you take it later in the year, you may delay the process of setting up a rollover account or completing the Roth conversion.
Do you have questions regarding the timing of your RMD? Creative Planning can help. Our experienced teams take time to get to know you, your current financial situation, your goals for the future and any challenges you may face before offering well-informed, custom solutions to meet your needs. For help with your RMD strategy, or with any other financial matter, please schedule a call with a member of our team.