Required Minimum Distributions: Time is Running Out

According to data from Fidelity Investments, approximately 20% of retirement account holders who are required to take their minimum distributions have yet to do so this year. As the deadline for these withdrawals approaches, it is essential to take action.

The current estimate provided by Fidelity is based on data as of November 28. The deadline for taking required minimum distributions (RMDs) is December 31. While there is still time, waiting until the last minute can be risky due to the potential need for a few business days to process the transactions.

RMDs are an integral part of ensuring the government receives its share of retirement savings that have grown tax-deferred over the years. Once you reach your early 70s, or potentially earlier if you inherit an account, you must withdraw a specific amount from your qualifying retirement accounts annually. Generally, this applies to traditional requirement accounts, with Roth 401(k)s being subject to RMDs this year but becoming exempt from 2024 onwards. It's important to note that the amount withdrawn counts towards taxable income.

This year presents a unique situation as there is no significant cohort of 70-somethings taking their RMDs for the first time. The initial age requirement had been 72 until the passage of the Secure 2.0 Act at the end of 2022, which raised it to 73 and became effective this year. Individuals turning 73 this year were subject to the requirement last year at age 72, while those turning 72 this year received a reprieve until 2024.

When it comes to timing your RMD, there isn't necessarily a right or wrong answer unless you miss the deadline. In such cases, penalties of up to 25% of the amount not taken on time may apply. The exact amount you need to withdraw is based on your age and your account balances at the end of the previous year. Therefore, waiting until the end of the current year won't affect the required sum. Keep in mind that financial firms typically calculate their clients' RMDs, but if you have accounts spread across multiple firms, it's your responsibility to determine the total amount.

Maximizing Your RMD: A Strategic Approach

If you rely on your RMD (Required Minimum Distribution) to cover your living expenses, it may be wise to consider automating your withdrawals on a regular schedule. This approach, recommended by Chris Briscoe, the director of financial planning at Girard Advisory Services, offers benefits in terms of budgeting and meeting your RMD requirements. Surprisingly, approximately 40% of Fidelity's RMD-eligible customers have chosen to automate their withdrawals, as revealed by Rita Assaf, the vice president of retirement products.

In relation to federal taxes, Fidelity defaults to withdrawing 10% of your RMD, though you have the flexibility to adjust this amount if desired. State taxes, on the other hand, are withheld according to specific state requirements. It is important to ensure that the appropriate amount is withheld from your withdrawals, as inadequate withholding could result in owing additional money at tax time.

If you do not require your RMD for immediate living expenses, you may prefer to wait and observe how the market performs before making your withdrawal. This strategy has proven beneficial for many in 2023. By holding onto their RMDs, individuals have been able to capitalize on the stock market's robust gains both in November and thus far this month. However, it is worth noting that the outcome was different last year when both stocks and bonds experienced significant declines.

For those who do not need their RMDs, there is an appealing option to consider: donating it to a qualifying nonprofit through a qualifying charitable distribution (QCD). With this approach, account holders can bypass touching their withdrawal altogether as it is sent directly from their brokerage firm to the chosen nonprofit. While this process often involves mailing a check, it is crucial to act promptly if you wish to pursue this option for the current year, according to Assaf.

One key advantage of choosing a QCD is that the withdrawn amount does not count toward your taxable income for the year. This can be particularly advantageous for individuals whose RMDs would otherwise push them into a higher income-tax bracket or result in higher Medicare premiums.

Remarkably, Briscoe has witnessed a rising interest among clients in utilizing QCDs this year. Despite his best efforts to encourage proactive decision-making, some clients invariably wait until the last minute to address their RMDs. In such cases, his advice is simple: "Just get it over with."