Are required minimum distributions bane or boon?

Many clients dislike taking money they don't need from retirement accounts after age 70 ½, and paying income tax on the superfluous withdrawals. On the other hand, tax-favored retirement accounts are meant to replace paychecks for seniors. Is it better to take RMDs throughout the year, for regular cash flow, or to wait until year-end?

"Generally, we like to wait as long as possible to take RMDs, so that the money stays invested," says Kathy Stepp, a principal and founder at planning firm Stepp & Rothwell in Overland Park, Kan. "However, if a retiree lacks other funds available, we take the RMD when cash is needed."

At Macro Consulting Group, a planning firm in Parsippany, N.J., senior partner Mark Cortazzo often recommends monthly checks for RMDs. "Those clients get checks throughout the year," he explains. "Others prefer to take their RMD as a lump sum; for them, we suggest doing so by mid-year. If they wait until the last minute, an illness, distraction, or processing issue could prevent the distribution and result in a 50% penalty. I don't believe the slight increase in tax deferral from waiting until the end of the year is worth the risk."

Should RMDs come from selling stocks, selling bonds, or passing through dividends and interest? "We often use RMDs as a way of rebalancing clients' portfolios," says Cortazzo. "For example, if someone has a target allocation of 50% stocks and 50% bonds and the stocks have performed well, we'll take the RMDs from the gains."


Stepp usually advises clients to have taxes withheld from their RMDs. "Then they don't have to worry about estimated tax payments," she says. "In addition, withholding is deemed to be equal throughout the year, so we can wait until year-end to take the RMD and not worry about underpayment penalties."

At some IRA custodians, 10% is the default amount withheld from RMD but other choices are possible. "We determine the withholding we want for individual clients," says Stepp. "Rarely is the portion as low as 10%, because we like to accomplish all of their tax payments this way—frequently the withholding is 100% of the RMD. This plan can be especially helpful for retirees who travel a lot and don't want to have to worry about making quarterly estimated tax payments. We joke that estimated tax is the most important bill they have to pay, yet they never receive an actual bill to remind them to pay it—that's the case even though the entity they are paying owns the post office and could easily afford to send out bills!”

Donald Jay Korn is a Financial Planning contributing writer in New York. He also writes regularly for On Wall Street.

This story is part of a 30-day series on Social Security and retirement income strategies.

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