If you're putting money into a pre-tax retirement plan, like a 401(k) or IRA, you'll eventually be required to take required minimum distributions (RMDs) and pay taxes on your contributions and any earnings. Whether you count on the RMDs to cover post-retirement expenses or resent having to take RMDs at all, you've got to admit that it's nice to be able to choose which month or months you plan to take them. It's all about doing what's best for you and your budget.
Some people break their RMDs into 12 equal monthly payments, a move that offers a steady flow of income. Others take theirs at the very beginning of the year so they can manage the funds throughout the year. And some wait until the 11th hour, taking their RMDs in December, just beating the December 31st deadline.
This article discusses the pros and cons of taking a once-a-year distribution in July and smack-dab in the middle of the year.
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Pros
There are benefits to deciding that July is the RMD month for you. They include:
- Flexibility: For many, summer is a less hectic time of year, making it the ideal time to focus on financial decisions and put time into detailed planning. If your primary goal is to use the funds in the wisest way possible, you may find that you have more time to dive into planning during the lazy days of summer.
- Tax planning: Because July is midyear, you know how much income you're on track to bring in for the year. Let's say you have income from a small business or a part-time job. Taking your RMD in July gives you time to spread out your taxable income, potentially preventing you from moving into a higher tax bracket.
- Splitting the difference: If you've never been quite sure if you'd rather have the money in hand early in the year or want to leave it until December so it has more time to grow, taking your RMDs in July allows you to split the difference. You don't have to wait the entire year to receive your funds, but you're still giving them an extra six months to grow.
- Investing: If you take your RMD in July rather than waiting for December, you can reinvest the funds sooner. This is especially helpful if you've recently learned about a high-quality, well-priced investment and don't want to miss out.
- Avoiding the rush: Can you think of any time during the year that's busier than the holiday season? Taking your RMD in July prevents the last-minute rush to meet your year-end deadline, reducing the risk of being penalized for not withdrawing the required funds.
Cons
Two primary cons are associated with taking your RMD in July rather than waiting until the end of the year. They are:
- Minimizes growth potential: The sooner in a calendar year you take an RMD, the less time your money has to grow if the market performs well. It can be a tough pill to swallow if you take an RMD right before the market takes off like a rocket.
- Market-timing risks: While it's probably a good thing no one can see the future (in most situations), it sure would come in handy regarding when to take an RMD. You'll always face the risk of the market suddenly getting red-hot in the days or weeks after you make your withdrawal. On the other hand, if you take an RMD as the market suffers a downturn, you'd miss the potential gains you could have made by leaving your assets where they were a little longer.
Like a game of chess, deciding when to take your RMDs is a strategic choice. It depends heavily on your financial situation, tax planning strategy, and market conditions. Unless you're counting on the funds to pay bills, you can always postpone a July RMD until later in the year -- another pro of planning for a July withdrawal date.
