RMDs can be taken efficiently or inefficiently.
Required minimum distributions (RMDs) are essential to traditional IRAs.
Because contributions to these accounts are tax-deferred, the government will levy taxes when distributions are made.
At these times, the withdrawals will be taxed as ordinary income.
According to a recent Kiplinger article titled “2 Essential Strategies for Taking Your RMDs,” rules governing the RMDs have changed throughout the years.
At one point, these distributions were required starting at age 70½.
The distribution age for RMDs was raised to 72 in 2019.
In 2020, none was required due to COVID-19.
When it comes to taking RMDs, some strategies are better than others.
Many people simply take their distributions in a single sum of cash at the end of the year.
However, you can be more intentional when electing to take withdrawals.
If possible, you should avoid taking your RMD when the market is declining.
Common sense, yes?
You can take your RMD at anytime in the calendar year.
In the year you turn 72, the government gives you more time.
You can wait until April 1st of the following year to make your withdrawal.
How do you know how much money to take?
RMDs are calculated based on the balance in your account on December 31 of the previous year.
The amount is divided by your life expectancy factor based on your age.
The Uniform Lifetime Table from the IRS provides these variables.
Distributions in 2021 will be larger because RMDs increase with your age claim a greater percentage of your account each year.
To better manage your money, it can help to take smaller installments throughout the year.
This can help with budgeting in retirement if you need the money.
What if you do not need the income?
You can still benefit from smaller installments.
You will avoid cashing out of the market at the highest and lowest points in the market.
This can be especially beneficial if you reinvest in a taxable account.
Carefully planning your RMDs maximizes the funds for your benefit rather than the benefit of the government.
A consultation with a financial advisor with expertise in all phases of retirement planning is money well-spent.
Better yet, establish a “relationship” with a financial advisor to help pilot you through each and every financial life stage.
Reference: Kiplinger (June 10, 2021) “2 Essential Strategies for Taking Your RMDs”