If you're of a certain age, you probably know about required minimum distributions (RMDs). And if you don't know about them, it's time to learn. Because some (but not all) tax-advantaged retirement accounts such as 401(k)s, traditional IRAs, SEP IRAs, and SIMPLE IRAs require you to withdraw RMDs beginning at age 73.
If you're planning to take your RMD this year, you might be wondering when to take it, and perhaps specifically wondering if you should take it in June. Here are some things to know that can help you decide.
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Don't be late!
The penalty for being late taking your RMD used to be severe. You generally had to fork over fully 50% of the amount you didn't withdraw on time. (Needed to take out $6,000 and didn't do so on time? That was a $3,000 penalty!) That has been slashed in half to 25%, but that is still a severe penalty.
If you realize that you just missed the deadline and you correct your mistake swiftly, the penalty may be just 10%. But the best move is simply to stay on top of your RMDs.
One thing that can help is checking with your brokerage or wherever your RMD-requiring account is housed to see whether they offer automated RMD withdrawals. Many good brokerages allow you to set up automatic annual withdrawals, and they'll even calculate the correct amount for you.
RMD deadlines to know
You have until April 1 of the year after you turn 73 to take your first RMD.
After that, the deadline is Dec. 31. So your second RMD will be due by Dec. 31 of the year you turn 74.
It can be smart to take your first RMD in the year you turn 73, otherwise you face having to take both your first and second RMDs in the same year -- the year you turn 74. That can increase your taxable income by a lot for that year, giving you a bigger tax bill and possibly even bumping you into the next tax bracket.
Should you take your current RMD in June, then?
There's no single best month for taking your RMD. Consider taking it as soon as you think of it, to get it out of the way and to avoid penalties. (If you set up automated withdrawals, though, you might set them for any date within the year.)
Alternatively, you might weigh some factors each year before taking your RMD. For example, if you expect the stock market (or your holdings) to increase in value by the end of the year, you might delay taking it to let the assets in your account grow in value as much as possible. If you're worried that the stock market is due to drop soon, you might take out your RMD before it does so.
Of course, no one knows what the stock market will do from day to day or even year to year, and trying to time the market is generally a futile endeavor.
If that's vexing news to you, consider applying the dollar-cost averaging principle to your withdrawals. With dollar-cost averaging, you invest a set sum on a set schedule -- such as, perhaps, $1,000 every month or $5,000 every quarter -- no matter whether the market is up or down. Similarly, you might break up your RMD into chunks and withdraw it in installments over time.
What to do with your RMD once you withdraw it
This is another important consideration, and there are lots of possibilities. For example, you might:
- Use it for living expenses.
- Put it in an emergency fund.
- Pay down credit card debt.
- Make an extra payment on your mortgage.
- Save it for future healthcare costs, which can be steep in retirement.
- Reinvest it in stocks or a money market account or wherever else you want.
- Donate it, via a qualified charitable donation (QCD).
Whatever you do, and whenever you plan to take your RMD, be sure you're not late.
