RMDs: now, or later?

CIO Global Blog

17 Jul 2019

Retirees subject to required minimum distributions (RMDs) must take them every year, or they risk being penalized. The IRS allows these annual distributions to be taken as early as 1 January and as late as 31 December; however, they don't specify exactly when they should be taken within the year. This often raises the question "when should I take my RMD?"

First, and foremost, it's wise to get these distributions in order prior to year-end. Waiting until the last minute may result in a hefty penalty if withdrawals aren't processed in time – any required amounts that aren't taken in time will be subject to a 50% penalty!

Timing matters

Before answering the RMD question of "now, or later?" it's important to understand how RMDs are calculated. Required minimum distributions are based on the account balance as of 31 December of the previous year. So, if a 75-year-old retiree's account balance was USD 1 million at the end of December last year, her required minimum distribution for this year would be USD 43,700. Even if the value of her account fluctuates throughout the year, the dollar amount stays the same. This stipulation has an important implication – the timing of your distribution matters.

For instance, let's expand on the example above. If that retiree took her RMD at the beginning of the year and her investments subsequently returned 10% by year-end, her balance would be USD 1,051,930. If, instead, she delayed her RMD until year-end, her balance would have grown USD 4,370 higher.

Now let's assume her investments fell by 10% over the year. An RMD taken in the beginning of the year would result in a balance of USD 860,670, where as a year-end distribution leaves her with USD 4,460 less. The answer is clear when investment returns are known: early RMDs are favorable when portfolio values subsequently fall and delayed RMDs are favorable when portfolio values have appreciated. Unfortunately, crystal balls are hard to come by.

When time isn't on your side, reduce uncertainty

Generally speaking, retirement assets are better left untouched for as long as possible. That's because the power of tax-deferred growth compounds over time. And, while in the accumulation phase, time is on your side. In retirement, it can seem like a good idea to continue delaying distributions for as long as possible to reap the benefits of tax-deferred growth. But when it comes to RMDs, it doesn't always pay to delay distributions.

That's because when there is a looming deadline, such as in the case of RMDs, time isn't on your side. All else being equal, IRA investments subject to RMDs are at a greater risk of loss in the presence of uncertainty because they can't "wait out" market volatility. One solution to ease the damage of short-term uncertainty would be to transfer IRA securities to a brokerage account in-kind. In addition to counting towards RMDs, in-kind transfers allow depressed risk assets time to recover. However, if there is an imminent need for cash flow liquidation can't be delay – time is of the essence and locked in losses may be your only option.

Since we have no idea what the future holds for our investments, RMDs taken at the beginning of the year may be advantageous for retirees relying on the funds for current spending. Taking your distribution in cash at the beginning of the year mitigates uncertainty of investment returns and assures that you'll have the funds available when they are needed regardless of market environments. But, for retirees who don't need RMDs to fund near-term goals, this uncertainty and potential growth can be intriguing.

Bottom line

Timing your RMDs with the market can work out in your favor if all goes as planned. But a favorable outcome isn't guaranteed. It's important to understand how difficult (and costly) market timing can be. The market's best days tend to occur around its worst days. And the phrase "buy low, sell high" may sound clever, but it has historically proven to be a fallacy.

Instead of basing your RMD timing decision on the market in isolation, consider how these distributions will fit into your plan. The "right" time to take RMDs for one investor will differ for another. But, trying to time your distributions with the market can be a gamble for most investors when the risk of losing isn't considered. And, if you're like most investors, retirement savings aren't something you're willing to gamble with.


Ainsley Carbone, Total Wealth Strategist Americas, UBS Financial Services Inc. (UBS FS)