Financial Planning
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Key decisions loom for people aged 73 and over who must take required minimum distributions (RMDs) from retirement accounts.
Extreme stock market volatility lately raises questions about when to take RMDs. Is it better to spread them out during the tax year or wait until year-end?
Meanwhile, if you turned 73 last year and haven’t yet taken your 2024 RMD, you have no option to wait: April 1 is the last day to draw your first RMD and have it count for 2024—If you don’t, penalties will begin accruing.
Annual minimum distributions are required from tax-deferred accounts such as individual retirement accounts (IRA)s, 401(k)s and 403(b)s once you turn 73.
For the year you turn 73, your RMD can be postponed until April 1 of the following year, but every year after it must be taken within the calendar year. If you postponed last year’s RMD to April 1, you will have to take both your 2024 and 2025 RMDs by the end of this year.
There’s an exception for workplace retirement plans: If you are still working and own no more than 5% of the business sponsoring your plan, you can hold off taking RMDs from that plan until you retire—no matter what age you are.
The amount of your RMD is determined by a life expectancy factor established by the Internal Revenue Service, based on the age you will be at year-end, and how long you are estimated to live.
You calculate your RMD by dividing your account value on Dec. 31 of the prior year by your life expectancy factor.
If your IRA assets were valued at $300,000 on Dec. 31 last year and you will be 75 at year-end, your life expectancy factor is 24.6, and your RMD for 2025 is $12,195.
You can look up your life expectancy factor on the IRS’s website and calculate your RMD yourself or use an RMD calculator, such as one on the U.S. Securities and Exchange website (https://www.investor.gov/financial-tools-calculators/calculators/required-minimum-distribution-calculator).
Your life expectancy factor will change every year, along with the size of your RMD.
If you have multiple retirement accounts, you must calculate the RMD for each one.
If you have multiple IRAs, you can tally up your RMDs and take the total from one account. The same goes for 403(b)s.
But if you have multiple 401(k)s and 457(b)s, you must take your RMDs separately from each account.
People who rely RMDs to live on typically take them either early in the year or in monthly or quarterly installments; others often wait until year-end so their money can grow tax-deferred for as long as possible.
If the stock market takes a nosedive when you’re planning an early-year or regular withdrawal, “you may want to tap the brakes if you have other resources to pay bills,” says Mark Parthemer, Glenmede’s chief wealth strategist.
Taking your RMD in a down market means you have to sell more shares of stocks to fulfill the requirement.
While you may want to delay an RMD during a substantial market downswing, it’s best not to habitually time your RMDs, especially if you live on them in retirement, says Jane Ditelberg, director of tax planning at Northern Trust.
Taking a lump sum either early or late in the year also has potential downsides. Early withdrawals miss out on tax-deferred growth if the market rises. And if you wait until December and the market slides, you can’t delay your distribution. Waiting to take your entire RMD until year-end is also risky. If the market slides in December, you can’t delay your distribution.
The safest bet for most investors is to spread RMDs throughout the year either quarterly or monthly for the best potential average results, Ditelberg says. “You’ll get some high days and some low days in the market.”
If you must take your RMD in a down market, one option is to leave battered stocks in your account to allow them time to recover. Instead pull out cash or assets that have held up in value.
Another option is to transfer depressed stockholdings from a tax-deferred account into a taxable account without liquidating them, says Ashley Weeks, a wealth strategist at TD Wealth. That still satisfies RMD rules. And although you will pay income taxes on the value of the transferred stock, by keeping the positions invested you can benefit from a future market rebound.
“Then your cost basis is re-established in a taxable account and future growth will be taxed as long-term capital gains (at a top rate of 20%),” Weeks says. By contrast, withdrawals from tax-deferred accounts are taxed as ordinary income with tax rates up to 37%.
There are risks to year-end RMDs that have nothing to do with market fluctuations, Weeks says.
“Things could happen that could prevent you from taking your RMD. The holidays. You could forget or get sick,” Weeks says.
The penalty for not taking an RMD is 25%. If you correct your mistake and file an amended tax return within two years, the penalty is reduced to 10%.
If you don’t need your RMD to live on, consider making a contribution from your IRA once you are over age 70 ½.
Every year you can make what’s called a qualified charitable distribution from your IRA account—this year the maximum is $108,000. It counts as part or all of your RMD as long as it goes directly to the nonprofit.
You don’t get to claim a charitable deduction on your tax return, but you don’t have to pay income taxes on the distribution.
If the charity wants to receive stock, you can maximize the number of shares you donate by doing so when the stock market is in a downswing, Ditelberg says.
But if a charity wants to hold cash, to keep more shares growing in your account “you want to give when the value of your account is high,” she says.
By Karen Hube
Taking RMDs Can Be Tricky. Here’s the Right Way.
Extreme stock market volatility lately raises questions about when to take RMDs. Is it better to spread them out during the tax year or wait until year-end?
Meanwhile, if you turned 73 last year and haven’t yet taken your 2024 RMD, you have no option to wait: April 1 is the last day to draw your first RMD and have it count for 2024—If you don’t, penalties will begin accruing.
Annual minimum distributions are required from tax-deferred accounts such as individual retirement accounts (IRA)s, 401(k)s and 403(b)s once you turn 73.
For the year you turn 73, your RMD can be postponed until April 1 of the following year, but every year after it must be taken within the calendar year. If you postponed last year’s RMD to April 1, you will have to take both your 2024 and 2025 RMDs by the end of this year.
There’s an exception for workplace retirement plans: If you are still working and own no more than 5% of the business sponsoring your plan, you can hold off taking RMDs from that plan until you retire—no matter what age you are.
The amount of your RMD is determined by a life expectancy factor established by the Internal Revenue Service, based on the age you will be at year-end, and how long you are estimated to live.
You calculate your RMD by dividing your account value on Dec. 31 of the prior year by your life expectancy factor.
If your IRA assets were valued at $300,000 on Dec. 31 last year and you will be 75 at year-end, your life expectancy factor is 24.6, and your RMD for 2025 is $12,195.
You can look up your life expectancy factor on the IRS’s website and calculate your RMD yourself or use an RMD calculator, such as one on the U.S. Securities and Exchange website (https://www.investor.gov/financial-tools-calculators/calculators/required-minimum-distribution-calculator).
Your life expectancy factor will change every year, along with the size of your RMD.
If you have multiple retirement accounts, you must calculate the RMD for each one.
If you have multiple IRAs, you can tally up your RMDs and take the total from one account. The same goes for 403(b)s.
But if you have multiple 401(k)s and 457(b)s, you must take your RMDs separately from each account.
To wait or not to wait?
People who rely RMDs to live on typically take them either early in the year or in monthly or quarterly installments; others often wait until year-end so their money can grow tax-deferred for as long as possible.
If the stock market takes a nosedive when you’re planning an early-year or regular withdrawal, “you may want to tap the brakes if you have other resources to pay bills,” says Mark Parthemer, Glenmede’s chief wealth strategist.
Taking your RMD in a down market means you have to sell more shares of stocks to fulfill the requirement.
While you may want to delay an RMD during a substantial market downswing, it’s best not to habitually time your RMDs, especially if you live on them in retirement, says Jane Ditelberg, director of tax planning at Northern Trust.
Taking a lump sum either early or late in the year also has potential downsides. Early withdrawals miss out on tax-deferred growth if the market rises. And if you wait until December and the market slides, you can’t delay your distribution. Waiting to take your entire RMD until year-end is also risky. If the market slides in December, you can’t delay your distribution.
The safest bet for most investors is to spread RMDs throughout the year either quarterly or monthly for the best potential average results, Ditelberg says. “You’ll get some high days and some low days in the market.”
Consider what assets to take out
If you must take your RMD in a down market, one option is to leave battered stocks in your account to allow them time to recover. Instead pull out cash or assets that have held up in value.
Another option is to transfer depressed stockholdings from a tax-deferred account into a taxable account without liquidating them, says Ashley Weeks, a wealth strategist at TD Wealth. That still satisfies RMD rules. And although you will pay income taxes on the value of the transferred stock, by keeping the positions invested you can benefit from a future market rebound.
“Then your cost basis is re-established in a taxable account and future growth will be taxed as long-term capital gains (at a top rate of 20%),” Weeks says. By contrast, withdrawals from tax-deferred accounts are taxed as ordinary income with tax rates up to 37%.
Beware other risks
There are risks to year-end RMDs that have nothing to do with market fluctuations, Weeks says.
“Things could happen that could prevent you from taking your RMD. The holidays. You could forget or get sick,” Weeks says.
The penalty for not taking an RMD is 25%. If you correct your mistake and file an amended tax return within two years, the penalty is reduced to 10%.
Turn your RMD into a charitable contribution
If you don’t need your RMD to live on, consider making a contribution from your IRA once you are over age 70 ½.
Every year you can make what’s called a qualified charitable distribution from your IRA account—this year the maximum is $108,000. It counts as part or all of your RMD as long as it goes directly to the nonprofit.
You don’t get to claim a charitable deduction on your tax return, but you don’t have to pay income taxes on the distribution.
If the charity wants to receive stock, you can maximize the number of shares you donate by doing so when the stock market is in a downswing, Ditelberg says.
But if a charity wants to hold cash, to keep more shares growing in your account “you want to give when the value of your account is high,” she says.
