There's just a little over two months left in the year. That means anyone who will be 73 years old or older by the end of 2025 must soon remove some money from any ordinary retirement account, although anyone who turned 73 this year has a little extra time.
The question is, do you want to take this taxable distribution as soon as possible -- as in, before October ends, or are you better off waiting until close to the absolute end-of-year deadline to do so?
There's actually a pretty clear answer to the question. But first things first.
What's an RMD?
Required minimum distributions (RMDs) are IRS-required withdrawals from most kinds of retirement accounts owned by anyone at or over the age of 73. In most cases, contributions to traditional/contributory IRAs and 401(k) accounts were not only tax-deductible but have also been allowed to grow tax-free. The IRS isn't going to let you sidestep taxes indefinitely, though. The tax-collection agency says 73 years old is as long as it wants to let anyone wait before finally paying the proverbial piper.
Roth IRA accounts, of course, aren't subject to RMD rules since these accounts are funded with post-tax income, and withdrawals from them aren't taxable events.
But what's the minimum part of this phrase we're talking about? Well, it changes with your age. The older you are, the more you must withdraw. For perspective, 73-year-olds are only required to remove about 3.77% of their IRA's value as of the end of the prior calendar year. Meanwhile, 85-year-olds must take out 6.25%. For 95-year-olds, the number is 11.24%. Your brokerage firm or IRA's custodian should be able to supply you with the specific information you need to complete the IRS worksheet that will help you figure out exactly how much you'll need to withdraw.
Also understand that this is only a minimum required withdrawal. You can remove more from your retirement account. Just bear in mind that doing so will result in a greater tax liability, as well as leave less in the account to continue growing.
As for timing, this is where things can get a bit strategic. You're only required to make this taxable withdrawal before the end of the calendar/tax year, and your very first one -- for the year in which you turn 73 -- can actually be completed as late as April 1 of the following year.
Just because you can wait that long to do so, however, doesn't necessarily mean you'll want to.
Timing isn't everything, but it can be something
Although most people will choose to do so, you're not required to take your RMD in cash. You can take it in the form of assets like stocks, bonds, or funds. You'll just want to be sure that what you're taking out of your retirement account is worth at least as much as your calculated required minimum distribution at the time the withdrawal is made.
But most required minimum distributions will be made in the form of cash, largely for reasons of convenience.
And this is where it pays to think strategically. While people's retirement-account holdings will differ, overall, if you're going to sell stocks in order to take your RMD, it's likely better to sell while the market's well up like it is now, rather than when it's well under a major high. In the case of the former, you'd be removing a smaller portion of your total retirement portfolio. In the latter scenario, you'd be removing a larger proportion, leaving less money in the account to continue growing.
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There's at least a little more to the story for most retirees, of course. Namely, if you're simply going to reinvest your RMD in other (or even the same) stocks, it doesn't exactly matter when you make your sale to fund your required minimum distribution. You're either selling high and then buying high, or selling low and then buying low. In both cases, you end up about the same.
If your required distributions are always going to be an important part of your retirement income -- and if every penny counts -- it makes sense to leave as much money invested in your tax-deferring IRA as you can for as long as possible.
Don't be penny-wise and pound-foolish
The obvious risk with selling something to meet your RMD in October while the market is high is that the market might be even higher before the end of the year. You could end up removing even a smaller portion of your IRA by waiting just a couple more months to complete the withdrawal. But, then again, no one knows where the market will be in December.
Be careful of aiming for laser-precise entries or exits. Short-term market timing is very difficult to do. Sometimes the quest for absolute perfection ends up doing more harm than good.
Bottom line? If you need to sell something to complete a cash required distribution from a retirement account, yes, doing it this month is a pretty smart move. All the nickels and dimes add up.
If you've already done so earlier this year, don't sweat it too much. No one's ever altered their entire financial situation with just one ill-timed RMD. Being smart with how you invest the money in your retirement accounts, as well as how you manage your cash outside of your IRAs, remains a far more important factor.
