The theme this week on the One Minute Retirement Tip is What You Need To Know Before Starting IRA Withdrawals. I’m answering the most common questions I get about IRA required minimum distributions, otherwise known as RMDs. 

Today, I'm talking about the best time during the year to take your rmd. now you might be sitting there thinking: why does this even matter? If I want to take my distribution in January vs December who cares? Or if I want to take my required minimum distribution every month why would that matter?

The truth is the timing of your RMD actually does matter - it matters a lot! Let me explain…

As I mentioned earlier this week the amount of RMD that you are required to take during the year remains fixed and determined from last year's ending balance and your current age. That dollar amount will not change during the year, but what will change during the year is your IRA or 401k account balance. And more often than not your IRA or your 401k account will be worth more money at the end of the year compared to the beginning of the year. 

Let's say you have $100,000 in your IRA account at the beginning of 2021. It's your first year of taking your RMD and you decide that you're going to take about $4,000 out of the account in 2021. If you take that $4,000 out in January when the account is still around $100,000, it works out to about 4% of your portfolio value that you end up withdrawing from your IRA that year. 

If however the portfolio grows by 10% or 20% this year, you don't have $100,000 in the account anymore. The account is now worth $110,000 or $120,000 depending on how much it grew in 2021. So if you were to wait until later in the year to take your mandatory withdrawal you still have to take that $4,000 out of the portfolio, but that $4,000 withdrawal now represents a smaller portion of the overall account.

As a result you put less stress on your portfolio financially, because your withdrawal is a lower percentage of the overall account balance. You be me asking yourself “what if my portfolio goes down in value that year?” If you wait until the end of the year you’d be taking a bigger portion of the account balance out if you wait. That's true and that's a very good point. 

However if you just look statistically, about 70% of the time your portfolio will grow in value over a given calendar year. So, seven out of ten years your portfolio will be worth more at the end of the year than it was worth at the beginning of the year.

While no one has a crystal ball and no one can say exactly what their account balance will be at the end of the year or if it will grow during the year, the statistics show that more than likely you will be better off taking your RMD as late in the year as possible compared to taking it early or even as a monthly income stream.

That's what I advise all my clients - whenever possible try to take a required minimum distribution later in the year.  It’s a small cash flow change, where you’ll give yourself the best chance of making your money last in retirement. You still receive the same amount of income during the year, but because you waited you took out a smaller percentage of your overall portfolio which can make a big impact in retirement. 

That’s it for today. Thanks for listening. My name is Ashley Micciche and this is the One Minute Retirement Tip. 

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