Is this the best time or worst time to take your RMD?

If you didn’t understand investment volatility prior to mid-February, recent events have provided a poster child for the definition. The most quoted measuring stick, the Dow Jones Industrial Average (DJIA) tumbled down more than 1,000 points for a couple of days, surged back up then repeated the process.

The intra-day market numbers often moved faster than a pinball bouncing off a wall. The culprit behind the volatility, of course, is the worldwide fear created by the Corona virus.

For most investors, current account values are well below their 2019 year-end numbers. But other than perhaps a few minor tweaks, there’s little that should be done during these turbulent times.

If you’re nervous, this is an opportune time to review your portfolio with your advisor. However, if you’re older than 70.5 (changing to 72 in 2021) and you have IRA, 401(k) or other retirement accounts, you just might be agonizing over your Required Minimum Distribution (RMD). Let me explain.

Uncle Sam has a table that dictates the minimum amount you’re required to withdraw, and subsequently pay income tax on, from your retirement accounts. The percentages used in the table are based on the previous year-end values.

I’m often asked what’s the best time of year to take the mandated RMD. Let me answer with an example. Suppose your 2019 year-end value was exactly $100,000 and, based on your age, the table shows you must pull out 5 percent in 2020. That’s $5,000. Now also suppose, because of the sudden downturn, the current value of your account is $95,000.

Uncle Sam doesn’t care if your account has decreased. You still have to withdraw and pay taxes on $5,000 from your account. This is why it’s decision time. Do you withdraw the $5,000 now? Do you wait until later in the year to give your account time to rebound, and then withdraw later? And what if the account values continue to tumble throughout the year?

These questions illustrate why it’s so difficult to choose the most opportune time to execute the mandated withdrawal. Based on my experience as an advisor, I have pretty much concluded that year in and year out it’s almost impossible to predict the best time for withdrawals.

It’s a lot like to trying to time the market, in that it’s virtually impossible to know the short-term direction the market will be heading. Bottom line, since you can’t determine the perfect time, don’t agonize over the timing.

However, I do recommend that investors arrange for their mandated distributions to be on autopilot and direct deposited. I say this because, as people get older, things tend to happen. I have had clients suddenly become ill and unable to sign needed forms.

Lately, a number of clients have been diagnosed with dementia and Alzheimer’s. It’s heartbreaking, but regardless of health, tax rules must still be followed. 

Rather than subject yourself to stress every year, once you reach RMD age, I suggest you do arrange for the process to be automatic. It might not be perfect timing, but it is one less thing to be concerned about.