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A podcast designed to help retirees and those nearing retirement navigate finances and life planning with expert insights from financial advisor Trevor Lawson. Tune in for practical strategies and inspiring ideas to ensure your retirement years are purposeful, fulfilling, and truly your best chapter yet.
*Securities and investment advisory services offered through Osaic Wealth, Inc. member FINRA/SIPC. Osaic Wealth is separately owned and other entities and/or marketing names, products or services referenced here are independent of Osaic Wealth. Branch phone: 919-546-0400.
Trevor Lawson: [00:00:00] Welcome to The Retirement With and On Purpose Podcast. I'm your host, Trevor Lawson, and this show is all about helping you not just reach retirement. But truly thrive in it. You've put in the work. Now let's make sure you can enjoy every moment to the fullest.
Today's episode is inspired by our good friend who I have been inspired by on previous episode, Christine Benzs at Morningstar. So, um. An article was published recently in Morningstar titled Retirees Should You Take RMDs Early in the Year Or Wait. As many of you retirees who may be listening, um, can relate, there's oftentimes an end of the year push to take your required minimum distribution to [00:01:00] satisfy your year's requirement and avoid penalties, but is waiting until the end of the year the right thing to do so.
Ms Bins presents several considerations here for waiting until the end of the year versus taking it equally throughout the year versus perhaps even taking it earlier in the year. And hopefully the pros and cons of these different approaches will, will inspire you to think and make sure that they, your current method of taking required distributions is appropriate.
Let's start here. I'm quoting your RMD for a given year is effectively determined by December 31st of the previous year for 2026 RMD takers. For example, their RMD amount will depend on their tax deferred portfolio balance as of the end of 2025. So even if your portfolio declines in value in 2026, lessening your [00:02:00] traditional.
Tax deferred balance, your RMD will still depend on that year in 2025 balance. So in other words, your balance on December 31st, 2025 will dictate how much you've gotta take out of your pre-tax accounts this year. And even if we happen to see a, a poor year in the market and your account value declines, we're still gonna have to take out.
The amount based on last year's balance, but within a given year, is there any advantage to taking your RMD as soon as you're able to, or taking it down to the wire and pulling the distribution in late December? Or is it better to be systematic about it taking monthly or quarterly withdrawals that equate to the RMD amount?
So we're gonna make a case for each. Option one. Christine Ben's notes wait until year. End. Why consider this? It's not a huge advantage over a lifetime of savings, but the main advantage of delaying until later in the year is a bit of extra tax deferred compounding. [00:03:00] And there's one particular type of client or investor who this is particularly, um, noteworthy for.
So let's use a simple single year example to illustrate how waiting can pay off. Assume 75-year-old Ann's IRA totaled a million dollars at the end of 2025, translating to a 2026 RMD amount of $40,650 if she took out and spent her RMD at the beginning of 2026. So she takes it out right away and the money remaining in her account subsequently earned 12% for the year.
She'd have 1,000,070 4,472 in her IRA at the end of 2026. So Ann took it out early. Account performs on average at 12%. Um, that's the, the investment return. She's got 1,000,070 4,000 4 72 at the end of the year. If, on the other hand, she delayed the RMD until year end 2026 and her full million dollars was earning 12% during the [00:04:00] year, her IRA would be worth 1,000,070 9, 350.
So about. You know, 5,000 more roughly after the $40,000, six 50 distribution, meaning more money in place for the year ahead. So that's, that would be a potential benefit of waiting until year end if the market does well, is it gives your monies another year to grow tax deferred and compound and. Would hypothetically lead to a larger balance at the end of 2026 if we did experience a very good year in the market.
Quoting Again, that's the story of any money that is invested for tomorrow and gains in value versus spent today. However, and of course, there's the potential for returns to break the other way. If her account lost, rather than gain 12% in 2026, she would've been better off taking out her RMD early rather than risking a larger sum in the market and taking her withdrawal later on.
But because stocks and bonds [00:05:00] more frequently gain in value than they lose, the benefits of an additional year of compounding can add up. That's the, the primary reason why we see a lot of investors wait until the end year end to take their required distribution is because the market on average goes up most years.
And this, this difference between, that we noted in our example of, of $5,000 more in this hypothetical client's investment portfolio. By waiting until the end of the year, when you take that 5,000 and compound it over a number of years, ends up being a much bigger balance for this investor. The other scenario where perhaps waiting until the end, until the end of the year to take your required distribution could make a lot of sense.
Is. Quoting here for retirees who are reinvesting some or all of their RMDs in a taxable account, rather than spending, the sole benefit of delaying RMDs is to have an additional year to take advantage of the tax [00:06:00] deferral afforded by the IRA. If Anne in our example, doesn't need the RMD money to live on and plans to reinvest her RMD in a taxable account, she'd obtained an additional year of tax deferral by leaving money inside the tax deferred wrapper.
So let's walk through that. So. In, in Ann's case, let's say like a lot of clients you don't necessarily, you know, need your RMDs to live off of. And so if we were to take that RMD at the beginning of the year and immediately move it into our brokerage account, that brokerage account is likely, you know, gonna have a, a higher balance for.
Year 2026, you're gonna get a 10 99 for the interest that that earns and, and perhaps end up paying more in taxes than you would have otherwise. If we left it in the IRA, which is growing tax deferred until later in the year, and then made the sweep over to the brokerage account. If [00:07:00] we do it that way, we get a whole.
Another year to, to Christine's point of, of tax deferral. So for those that are taking their RMD and immediately reinvesting into the brokerage account, there's, there's a strong case to be made for waiting until later in the year to take it and invest it. To counter this, though, why would we avoid taking an RMD.
Later in the year. So those tax deferred compounding benefits could add up for very wealthy retirees, but may not be a big deal for smaller investors. For one thing, the post RMD period is usually shorter than the accumulation period. In other words, the amount we have to take our RMDs because we're not forced to start until our early seventies.
It's a much shorter time between then and average mortality than it is for the accumulation period where we're, where we're building up our account balance. The shorter of timeframe, the less the compounding benefit. It's [00:08:00] also worth bearing in mind that most retirees portfolios are more conservative and therefore lower returning than on accumulators.
So the compounding and or tax deferral opportunity by delaying may not be extreme. The other bi. The other big disadvantage of delaying is that year end gets busy delay. Delaying RMDs can heighten the risk of missing a distribution and having to pay a penalty. So a lot of people do wait until year end for reasons we've mentioned, and there's a penalty if we don't take out the the full required amount by year end.
Another risk, especially for older retirees is that if you die late in the year before taking your RMD, you could be leaving. Hes with a tight window to make RMDs from the account. Finally, waiting isn't advisable if you think you want to convert any of your IRA assets to Roth, because you'll need to take your RMDs before undertaking a conversion.
So for those that are of age where they're having to take a required distribution, but you're also [00:09:00] doing Roth conversions, you can't make a conversion for the year until the RMD has been taken. So for those clients, it it. Could make more sense to go ahead and take your RMD sooner in the year so you can, you can time your conversion more, uh, strategically.
So option two here. This is talking through the pros and cons of taking the RMD as soon as possible. Why would we consider that the big benefit to taking RMDs as soon as possible is to ensure that you don't forget and risk a penalty. That also removes the possibility that you would leave your heirs with a tight window to take RMDs if you died.
If an IRA conversion is on your radar, taking an RMD earlier in the year frees you up to do that later on. Additionally, as discussed above, if retiree is pulling RMDs from living expenses, but the IRA subsequently drops in value throughout the year. You'd have been better off taking the money out earlier and leaving less money at risk of losses.
[00:10:00] Finally, if you use your RMDs to address problem spots in your portfolio, pulling withdrawals from your mu most appreciated assets, for example, to aid and rebalancing as best to make those adjustments as soon as possible. So those are potential counter reasons to think about taking your RMD as soon as possible.
Why would we potentially avoid that? So here's the counter argument. There might be foregone tax deferred compounding opportunities as we've already outlined above. Moreover, in particularly bad market environments. Like March of 2020, Congress might vote to not require RMDs in a given year. Retirees who took their RMDs early may have to jump through some hoops to get the funds back into their account.
Christine Ben's notes that example of March, 2020. That was also, um, potentially a result of you COVID and the pandemic, and that was just Congress kind of. You throwing us a bone to help us as much as possible during that, that [00:11:00] time financially. So who knows if in future bad market years if that that's on the table or not, but certainly something worth, worth noting.
Finally, option three. So option three would be spacing your required distribution throughout the year. So rather than taking it all at the beginning of the year or all at the end of the year, we space it out. Why would we consider this taking distributions semi-annually, quarterly, or monthly with those distributions equaling the full year RMD amount helps ensure that you receive a range of prices for the assets that you sell.
So market's going up and down. You take out money on a, on a frequent basis, you're increasing the likelihood that you may pull out when the market's up and down. So selling at at a, at ranging prices. Just as dollar cost averaging ensures that you never buy at the precisely wrong or right time. Taking RMDs and installments guarantees that you'll never sell at precisely the right or wrong time.[00:12:00]
A retiree taking RMDs and installments would retain some, but not all of the benefits of tax deferred compounding. Afforded the retiree who takes a yearend distribution. So if we're taking it on a quarterly or semi-annual basis, you're also getting some of the benefits of tax deferral by not taking it out all at once during the beginning of the year.
While it may might seem logistically more difficult to take multiple RMDs throughout a given year, most financial providers who have MD services that calculate and disperse installment amounts on the schedule you dictate monthly, quarterly, semi-annually. Um, can, can help you with this. So. From a logistical standpoint, most financial providers can help, help accomplish this.
This, for you, why would you avoid spacing? The RM D though? Throughout the year there aren't really any major drawbacks to taking RMDs and installments. But if you're taking RMDs manually throughout the year, rather than relying on your investment provider services, there's a risk you could miscalculate or fail to take all of your [00:13:00] distributions.
In addition, depending on the service, you. Service your provider offers, you may not be able to engage in the sort of surgical RMD taking that can enhance returns and reduce risk. So the big risk for, for do it yourself investors are those that aren't working alongside a financial professional are as, as Christine Ben's noted, just.
Miscalculating the amount that you've gotta take and, or, you know, not, not optimizing the timing of those distributions, but interesting food for thought. Nonetheless, I know a lot of people. Default to waiting until the end of the year, and there's several arguments as we've noted today that support that rationale, but it's worth entertaining the potential benefits of taking it earlier in the year or spacing those distributions out as well.
As well. I hope you found this article very insightful. As always, you'll be able to reference it in today's show notes. And until next time, [00:14:00] take care and I look forward to being with you soon.
Thanks for tuning in to The Retirement With and on Purpose podcast. I hope you're walking away with new ideas and a fresh perspective on how to make the most of your retirement journey. And remember, retirement isn't the end. It's your time to live with purpose. Until next time, I'm Trevor Lawson. Here's to a fulfilling and thriving retirement.