For older folks, deciding when to take your required minimum distributions (RMDs) begins with asking yourself whether you need the money to pay monthly living expenses. If you do, taking RMDs monthly provides you with a steady cash flow and can help with budgeting. If you don't, an annual withdrawal can simplify your bookkeeping.
You may not have a say in whether you take RMDs, but you get to decide when you're going to take them. Here are some of the pros associated with each strategy.
Image source: Getty Images.
The pros of monthly RMDs
- Customizable: Taking regular monthly distributions lets you adjust your withdrawals as needed. For example, if your car needs work, you can withdraw a bit more than usual that month.
- The comfort of regular cash flow: If you've spent your entire adult life receiving a paycheck at regular intervals, it may feel more "natural" to be able to count on an income source hitting your bank account on the same day each month.
- Withdrawals can be based on market conditions: Let's say a bear market occurs midyear. You can decide whether you want to sell more of your assets to make the withdrawal or lean on money you have put away in a money market account or some other emergency fund.
The pros of annual RMDs
- More time to grow: Leaving your money in a retirement account for as long as possible gives it more time to grow tax-deferred. Even a few months can make a difference of thousands of dollars.
- Taxes: You have more control over your tax situation by managing when the withdrawal is made. Because RMD withdrawals are taxed as ordinary income, it's important to figure out if there's a time of year when an annual withdrawal is less likely to push you into a different tax bracket.
- Tracking your income: It's easier to manage and track an annual distribution than multiple monthly withdrawals. You may find annual withdrawals especially attractive if you have multiple retirement accounts.
- Helps cover planned large expenses: If you have big plans, such as buying a car, making a new investment, or taking a long-awaited trip, an annual payment could make it easier to cover the cost.
The cons of monthly withdrawals
Let's say you make monthly withdrawals, and for the first few months of the year, everything goes fine. At midyear, something big happens globally, the market dips, and your assets lose value. Unless you have money put away in other accounts, you could be forced to sell a greater number of assets to net the money you need to cover living expenses with your withdrawal.
The cons of annual withdrawals
While annual withdrawals may be convenient, it can be tempting to spend the money in greater chunks than you planned. Following an RMD, you may feel flush with cash and handle the money less conservatively than usual.
The bottom line is that there is no one-size-fits-all time to make RMD withdrawals. It all comes down to what works for your budget, how much record-keeping you're willing to do, and how withdrawals impact your tax burden. If you're at all concerned, a financial advisor can run different scenarios that may offer clarity.
