Q. I usually wait for the end of the year to take my Required Minimum Distribution (RMD) but with the market so bad, should I take it now?
— Investor
A. You’re right in noting that this has been a bad year for the stock market.
But without a crystal ball telling you when the market will be at its highest point, there can be no right or wrong answer to this question.
We can only make educated guesses combined with assessing your individual needs, said Darren Zagarola, a certified financial planner and certified public accountant with EKS Associates in Princeton.
“Since it’s always best to sell an asset when the market is high, in hindsight, it would have been better to fund the RMD earlier in the year,” he said. “But who knew the market would drop more than 20%? And yes, it’s possible the market may continue to fall between now and the end of the year.”
In looking at when to take distributions, let’s address the requirements and what timing might be right for you.
Everyone with a traditional retirement account is required to take a minimum distribution from the account starting the year they turn age 72, Zagarola said.
To calculate your RMD, divide the year-end value of your IRA from last year by the distribution period value that matches your age on Dec. 31, he said. You can use these IRS RMD worksheets to help you, and remember to recalculate your RMD every year using the IRS table for your age. Also, remember your distribution is taxable and must be taken by Dec. 31 of the current year, he said.
There is one exception for the first year of RMDs, he said.
“In the first year of RMDs, you can delay your distribution until April 1 of the following year, but you still have to take the RMD for age 73 in that same year by Dec. 31,” he said. “For example, if you turn 72 years old in 2022, you can delay your distribution until April 1, 2023, but you must take an additional distribution for age 73 by Dec. 31, 2023.”
After that, you must take annual distributions by Dec. 31, he said.
Some people take their distribution early in the year to fund that year’s living expenses, and others wait until the end to support the following year’s expenses, Zagarola said. This decision is based on how you manage your budget and cash flow needs.
Another reason people may wait until the end of the year to take the distribution is so they don’t pay taxes to the government too early – in effect giving the federal government an interest-free loan, he said.
There’s also the group that tries to time the market, which we never recommend, he said.
“We recommend that our clients keep three years of RMDs liquid in cash or a bond ladder — a portfolio of individual CDs or U.S. Treasury Bonds that mature on different dates,” he said. “This strategy ensures that market volatility won’t impact when you can take the distribution.”
Without a bond ladder or cash reserve, you will have to sell an asset when the cash is needed, he said.
“Remember, the distribution amount remains the same no matter where the market moves,” he said. “The question is will you have to sell more or less shares of your investment to fund that distribution, assuming you are 100% invested and not sitting in cash? The more shares you have to sell, the larger your losses are for the year.”
Email your questions to [email protected].
Karin Price Mueller writes the Bamboozled column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com’s weekly e-newsletter.
