What time of year is best?
Most people know upon reaching age 70½ you must soon begin taking withdrawals from most retirement plan accounts.
The exceptions will be Roth IRAs and 401K plans if you are still working for the plan sponsor and their plan document allows a postponement of distributions until after retirement. For owners of 5 percent of more of the company, this exception does not apply.
Please note that contributions to a Roth 401K plan may still require a Required Minimum Distribution, or RMD, at 70½ unless you meet the exception noted above.
Everyone has their own ideas about when during the year is the best time to take your RMD. I advocate early in the year. The amount that you must withdraw based on the fair market value of your retirement account as of the last day of the prior year, divided by your life expectancy according to the government tables.
There are a couple of good reasons to take that RMD early. The first one is really kind of simple – but effective. If you take the RMD early in the year you can’t possibly forget to take it. The stiff penalty for forgetting to take the RMD is 50 percent of the amount that you were supposed to withdraw. If you haven’t yet taken your 2018 RMD, there is no time like the present.
The second reason may be due to complications from death. I know that most readers do not contemplate their own passing this year, but realize that if you do pass away and the RMD is missed by the appointed person or the retirement account beneficiaries, the 50 percent penalty will apply.
The first RMD is also a little tricky.
Your first distribution must be made by April 1 of the year following the year you turn 70½. It almost feels as if the law makers were trying to trip you up on this one.
So: your 70th birthday is July 1, 2017. The six month date is January 1, 2018. Your first RMD has to be withdrawn by April 1, 2019.
To add to the trickery, if you wait, in 2019 you’ll have to take two distributions - one for 2018 and one for 2019.
This is another great reason to work with an experienced planner during this time. Waiting to do two RMDs in one year may cause bracket creep, and leave you in a higher tax bracket that you would have been had you taken your first RMD in the prior year -- even though you didn’t have to.
Those who retire before age 70 may have a tax planning opportunity. That opportunity could be to start small retirement withdrawals or Roth conversions right after retirement if you are in a low tax bracket. Utilizing these low bracket years right after retirement can significantly reduce your future RMDs. The higher your net worth and retirement income, the better this tactic may work over your retirement.