A required minimum distribution (RMD) is the minimum amount you must withdraw from your traditional IRA, SEP IRA, SIMPLE IRA, 401(k), 403(b), or 457(b) accounts once a year. No matter when you retire, RMDs are not mandated until you reach age 73 (or 75 if you were born in 1960 or later).
While there's no official "best" month to take your required minimum distribution (RMD) -- and you can make as many withdrawals as you want in a year to hit your minimum, or above that amount -- routinely making your full withdrawal in December may be a smart move. The operative words here are "may be." Here are five good reasons to make December the month you take your required distributions, and three reasons you may want to think twice.
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For some, taking RMDs in December is ideal. Here's why:
1. It maximizes tax-deferred growth
As long as the market continues to provide a positive return on your investments, waiting until December to make the required withdrawal gives your money more time to grow. Provided you don't need those funds to pay bills throughout the year, you're ahead.
2. It provides time to adjust you withdrawal amount
By December, you've got a pretty good idea of how the market is doing and can adjust your withdrawal based on market performance.
Let's say you've been planning to withdraw above and beyond your RMD to pay for a holiday trip this year. However, by October, it's clear the market is in free fall, and your portfolio has lost value. Since you don't want to sell more of your assets than necessary to make your withdrawal, you decide to postpone the trip until the market improves.
While you must take your RMD for the year, you're free to leave any additional funds where they are.
3. It leaves room for a pre-December surprise
Imagine your uncle dies and leaves you an inheritance, or you decide to sell a piece of land and find yourself with extra money. Waiting until December to make a withdrawal means you have the complete picture of how much you'll owe in taxes.
It's possible that once you include the unexpected income, you'll be close to a higher tax bracket. With that knowledge, if you were planning to withdraw more than the minimum, you can decide how much to withdraw without paying a higher tax rate.
4. It can simplify taxes
Making a withdrawal at the end of the year means dealing with the tax implications of a single distribution rather than multiple transactions throughout the year. And because you can elect to have federal (and state, depending on where you live) taxes withheld at the time of distribution, there's no need to make estimated payments to the IRS.
5. You could pay less in transaction fees
Depending on how your investment platform is structured, you could find yourself paying transaction fees on each withdrawal, ultimately costing you more throughout the year than a single December withdrawal.
But like most financial decisions, December RMD withdrawals are not for everyone.
Here's why it may not be right for you:
1. There is greater risk of missing the deadline
RMDs must be taken by Dec. 31, and waiting until the last minute increases the risk that you'll miss the deadline and get penalized. If you take RMD withdrawals in December, get the ball rolling early in the month, especially if you're counting on your financial institution to process the withdrawal in time.
2. It may mess with your cash flow
Unless you have a healthy emergency fund available, you could need cash before you've begun the withdrawal process. Imagine waking up after a night of hard rain to find your basement flooded. Not only do you need to buy a new sump pump, but you must pay a company to help you get the room dried out. In addition, you decide to have the basement waterproofed before loading your possessions back in.
In a situation like this, it's possible that making withdrawals once a year -- and spending the money when you withdraw it -- would leave you with too little cash when it's most needed.
3. There is less room for adjustments
Another disadvantage of taking RMDs in December is that you could get out of the habit of keeping an eye on the market and adjusting your financial strategy as needed. For example, if the midyear market is shaky, you may want to move a portion of your portfolio into more conservative investments. However, if you're not aware of how the market is trending, you may let things ride rather than remain actively involved.
There is no one-size-fits-all answer to when you should take RMDs. The best move for you is to look at your circumstances, ensure you have enough throughout the year to cover bills and any emergencies that may arise, and base your decision on what works best for your bank account.
