When to make annual RMD withdrawal from 401(k)

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mrag
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When to make annual RMD withdrawal from 401(k)

Post by mrag »

Assume I had $200K in my 401k at the end of 2020. It is invested in a Vanguard Index fund. Given my age say I have to withdraw about $10,000 in 2021 to meet the RMD requirements. To date the fund is up about $11,000. I actually need about $12,000 by the end of each year for taxes and gifts to my grandchildren, etc. so the RMD is not a painful requirement.

The question is, should I take out the $10,000 now while the fund is up and meet the RMD or should I wait and take my chances at year's end? I hope that makes sense.

(I apologize if I am in the wrong section)
chassis
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Re: When to make annual RMD withdrawal from 401(k)

Post by chassis »

I would leave the money in the market until the second before it was payable by law.
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Rager1
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Re: When to make annual RMD withdrawal from 401(k)

Post by Rager1 »

Well, do you like to gamble?

If your portfolio is up now by $11,000 and your RMD is $10,000, do you want to wait until later to take it? The market is either going to be higher, or lower, and no one knows where it will be later.

It's your decision to make. You'll only know if your choice was a good one after the fact.

Ed
RetiredAL
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Re: When to make annual RMD withdrawal from 401(k)

Post by RetiredAL »

OP - I disagree with waiting until the last moment.

My Dad's monthly RMD for Oct 2018 didn't happen. We noticed this mid November as we were attempting the convert the account to self-directed, as his previous advisor had left the system. In spite of several phone calls, where we were told each time they would fix it and catch up the missing withdrawals, year end came with him being short 3 month's of withdrawals. His IRA's are no longer with that broker.

Today at 96, his health is poor. As soon are his 2020 taxes were done, so I'd know if I needed to change the withholding for 2021, I withdrew his RMD on April 4. This way, no matter what happens, his RMD is over and done with.
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arcticpineapplecorp.
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Re: When to make annual RMD withdrawal from 401(k)

Post by arcticpineapplecorp. »

i don't think there's one right answer.

probability wise it is probably better to leave it in only because markets have tended to rise 3 out of 4 years over the past 40 years so odds are in your favor of selling less shares for the same amount. But that's far from certain. You're trying to minimize regret by the sound of it. So perhaps a bird in the hand is worth two in the bush to you. If you'd regret a loss by waiting, then take sooner.

Some things to think about:

1. if you die before thetaking your RMD, your heirs will have to remember (or know) to take your RMD you should have taken but didn't.
2. if you sell now you lock in the gains from last year (becuase this year's RMDs are based on last year's ending balance) even if those gains disappear by the end of the year.
3. Paul Merriman I believe said he takes his RMDs at the beginning of the year that way he knows he's got the money he was counting on and gets the RMDs out of the way.

Another thing to think about is perhaps you want more bonds in the 401k and stocks in the Roth IRA and/or taxable accts. If you do this, you don't really have to worry about a loss in value by waiting to take your RMD at the end of the year, because bonds shouldn't fall that much.

You can accomplish this in a couple ways. Either:
1. have all bonds in 401k (if that works for your overall AA)
2. have a conservative target date index fund (if available in 401k) which would suffer much smaller losses
3. hold separate funds in 401k (stock index and bond index funds). That last way you could draw RMDs from stocks if they're up, or draw RMD from bonds if stocks are down.

life's full of different options.

p.s., if you take early in the year either have the taxes withdrawn at the time of the RMD or pay your estimated taxes if required to avoid any potential penalties for late payment.

welcome to the group.
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RetiredCSProf
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Re: When to make annual RMD withdrawal from 401(k)

Post by RetiredCSProf »

At least six months before I plan to take my RMD, I move enough into a MM fund (cash reserves) to cover it. I learned this lesson during the March 2020 dip when all my funds, including ST bond funds, were down.

My advice is either take the RMD now or move $XX into MM in your 401(k) until you are ready to take the RMD. Will you be withholding taxes from the RMD?
trueblueky
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Re: When to make annual RMD withdrawal from 401(k)

Post by trueblueky »

RetiredAL wrote: Wed Jun 16, 2021 7:28 pm OP - I disagree with waiting until the last moment.

My Dad's monthly RMD for Oct 2018 didn't happen. We noticed this mid November as we were attempting the convert the account to self-directed, as his previous advisor had left the system. In spite of several phone calls, where we were told each time they would fix it and catch up the missing withdrawals, year end came with him being short 3 month's of withdrawals. His IRA's are no longer with that broker.

Today at 96, his health is poor. As soon are his 2020 taxes were done, so I'd know if I needed to change the withholding for 2021, I withdrew his RMD on April 4. This way, no matter what happens, his RMD is over and done with.
^^^
This. Do not wait until the last moment. Stuff happens. I would take it by November at the latest to leave time for any glitches on the part of the brokerage. You do not want to be cleaning up the mess if the distribution is not timely.

October may be good as it pushes the income into 4th quarter, but any taxes withheld count as timely, if that's a consideration.
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ruralavalon
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Re: When to make annual RMD withdrawal from 401(k)

Post by ruralavalon »

Welcome to the forum :) .

mrag wrote: Wed Jun 16, 2021 4:36 pm Assume I had $200K in my 401k at the end of 2020. It is invested in a Vanguard Index fund. Given my age say I have to withdraw about $10,000 in 2021 to meet the RMD requirements. To date the fund is up about $11,000. I actually need about $12,000 by the end of each year for taxes and gifts to my grandchildren, etc. so the RMD is not a painful requirement.

The question is, should I take out the $10,000 now while the fund is up and meet the RMD or should I wait and take my chances at year's end? I hope that makes sense.

(I apologize if I am in the wrong section)
In general leave money invested until you need cash for some purpose. So wait until closer to year's end to take the Required Minimum Distribution (RMD).

But waiting until the very last minute could be hazardous.

We take my RMDs automatically every month (with taxes withheld), to help pay retirement living expenses. I don't try to time the market.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
trueblueky
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Re: When to make annual RMD withdrawal from 401(k)

Post by trueblueky »

RetiredAL wrote: Wed Jun 16, 2021 7:28 pm OP - I disagree with waiting until the last moment.

My Dad's monthly RMD for Oct 2018 didn't happen. We noticed this mid November as we were attempting the convert the account to self-directed, as his previous advisor had left the system. In spite of several phone calls, where we were told each time they would fix it and catch up the missing withdrawals, year end came with him being short 3 month's of withdrawals. His IRA's are no longer with that broker.

Today at 96, his health is poor. As soon are his 2020 taxes were done, so I'd know if I needed to change the withholding for 2021, I withdrew his RMD on April 4. This way, no matter what happens, his RMD is over and done with.
^^^
This. Do not wait until the last moment. Stuff happens. I would take it by November at the latest to leave time for any glitches on the part of the brokerage. You do not want to be cleaning up the mess if the distribution is not timely.

October may be good as it pushes the income into 4th quarter, but any taxes withheld count as timely, if that's a consideration.
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JamesSFO
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Re: When to make annual RMD withdrawal from 401(k)

Post by JamesSFO »

I am finding as my parents age I need to help them with this and just from a practicality standpoint doing it earlier in the year is better because I don't need to bookkeep whether we did it what not.
Lionel Hutz
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Re: When to make annual RMD withdrawal from 401(k)

Post by Lionel Hutz »

Danger of waiting until last day in December: what if your 401k/IRA firm messes something up and RMD isn’t distributed until January? That’s not impossible; this really happens.

Sure it’s not your fault, but it’s your problem. While you could probably obtain some sort of letter of indemnification it’s not a guarantee, and even so it’s more hoops to jump through when filing.

Why not take it in June or September? All this is market speculation anyway, so give yourself a buffer so it’s taken before deadline, and you have time to address any firm errors in amount, tax withholding, etc.
backpacker61
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Re: When to make annual RMD withdrawal from 401(k)

Post by backpacker61 »

I really like the idea of automated distribution services. My parents made use of such an automated service to take quarterly distributions from my Dad's tIRA. An automated service also takes emotion off the table, and as they got to be "old, old", it was helpful to have the money flowing automatically to their bank checking account.
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UpsetRaptor
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Re: When to make annual RMD withdrawal from 401(k)

Post by UpsetRaptor »

Because the market trends upwards over time, the theoretically optimal timing from a purely financial perspective would trend towards doing it as late as possible every year. Maximizes your Uncle Sam-subsidized gains.

However, the simplest timing is to do it earlier in the year, as your heirs will appreciate the RMD having been already taken whatever year you pass. Anecdote: A older relative of mine didn't understand they had to check if RMD was taken on an inherited IRA the year the owner passed, and it ended up causing them problems with the IRS.

If you're at a point where you can choose when to take your RMDs, you presumably no longer require the optimal and thus I'd vote for simplicity.
Topic Author
mrag
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Re: When to make annual RMD withdrawal from 401(k)

Post by mrag »

I very much appreciate all the suggestions on when to take the RMD. Initially I wanted to make sure I wasn't missing something obvious. Now considering the taxes (and the market cratering today) and other ideas maybe there is more to consider. If I took out a portion early in the year, say $4000 in March, TIAA would withhold $800 of that which I wouldn't stand a chance of seeing any of that until the next year assuming I do an Elon Musk and pay no taxes :D . Then what to do with the net $3200 I would have in March? Put it in the credit union for maybe a 1% rate? TIAA's money market does NOT pay any interest. Could TIAA's investment people do better than me (purely rhetorical)? However, if Jamie Dimon thinks it's good to just sit on $500 billion, that should be good enough for me. As it turns out and more through neglect than planning, I already have about 60% of the RMD requirement in the money market. Whatever the eventual case, I will make sure to get out the annual RMD funds by Thanksgiving at the latest.
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ruralavalon
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Re: When to make annual RMD withdrawal from 401(k)

Post by ruralavalon »

mrag wrote: Fri Jun 18, 2021 2:04 pm I very much appreciate all the suggestions on when to take the RMD. Initially I wanted to make sure I wasn't missing something obvious. Now considering the taxes (and the market cratering today) and other ideas maybe there is more to consider. If I took out a portion early in the year, say $4000 in March, TIAA would withhold $800 of that which I wouldn't stand a chance of seeing any of that until the next year assuming I do an Elon Musk and pay no taxes :D . Then what to do with the net $3200 I would have in March? Put it in the credit union for maybe a 1% rate? TIAA's money market does NOT pay any interest. Could TIAA's investment people do better than me (purely rhetorical)? However, if Jamie Dimon thinks it's good to just sit on $500 billion, that should be good enough for me. As it turns out and more through neglect than planning, I already have about 60% of the RMD requirement in the money market. Whatever the eventual case, I will make sure to get out the annual RMD funds by Thanksgiving at the latest.
The market is not "cratering today".

In my opinion you are overthinking this.

Don't try to time the stock market or the bond market.

Take money out when you need it (in your situation toward year end), and have taxes withheld.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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retired@50
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Re: When to make annual RMD withdrawal from 401(k)

Post by retired@50 »

mrag wrote: Fri Jun 18, 2021 2:04 pm I very much appreciate all the suggestions on when to take the RMD. Initially I wanted to make sure I wasn't missing something obvious. Now considering the taxes (and the market cratering today) and other ideas maybe there is more to consider. If I took out a portion early in the year, say $4000 in March, TIAA would withhold $800 of that which I wouldn't stand a chance of seeing any of that until the next year assuming I do an Elon Musk and pay no taxes :D . Then what to do with the net $3200 I would have in March? Put it in the credit union for maybe a 1% rate? TIAA's money market does NOT pay any interest. Could TIAA's investment people do better than me (purely rhetorical)? However, if Jamie Dimon thinks it's good to just sit on $500 billion, that should be good enough for me. As it turns out and more through neglect than planning, I already have about 60% of the RMD requirement in the money market. Whatever the eventual case, I will make sure to get out the annual RMD funds by Thanksgiving at the latest.
Just because you remove the money from the 401k plan for RMD purposes, doesn't mean you can't keep the money invested in a taxable account using a tax-efficient stock index fund.

In other words, if you don't really need the cash for current spending, just take it out of the 401k account, and buy something in the taxable account.

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
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