Ep. 232 – Required Minimum Distributions in Retirement – Monthly, Quarterly, or Annually?

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In this Episode of the Secure Your Retirement Podcast, Radon and Murs discuss the best time to take Required Minimum Distributions. Having a retirement plan and your personal preference will help you determine whether to take RMDs monthly, quarterly, or annually.

Listen in to learn the advantages and disadvantages of taking required minimum distributions monthly, quarterly, or annually. You will also learn how the three-bucket strategy’s income safety and growth buckets can work together to your advantage.

In this episode, find out:

• Required Minimum Distributions – the amount you’re required to take out of your tax-deferred accounts.
• The importance of understanding when you have to start taking your RMDs to develop a withdrawal strategy earlier.
• Understanding how to utilize Roth IRAs as a tax-free bucket for retirement planning.
• The categories of investment accounts are subject to required minimum distributions and when to take them.
• The potential advantages and disadvantages of taking required minimum distributions monthly.
• The three-bucket strategy – how the income safety and growth buckets work together to your advantage.
• The potential advantages and disadvantages of taking required minimum distributions quarterly.
• The potential advantages and disadvantages of taking required minimum distributions annually.
• Questions to ask to determine your personal preference of taking RMDs monthly, quarterly, or annually.

Tweetable Quotes:

• “Understanding when you have to start taking those required minimum distributions is going to be key to developing a plan and a strategy around them.”– Murs Tariq
• “Required Minimum Distributions (RMDs) are based out of the totality of your IRAs, but you do not have to take it out of each account.”– Radon Stancil

Resources:

If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!

To access the course, simply visit POMWealth.net/podcast.

Here’s the full transcript:

Radon Stancil:	Welcome to Secure Your Retirement Podcast. Murs and I today have a topic that is something that is really big, especially as you get closer to the end of the year. It’s all about required minimum distributions, and the focus of this particular discussion that we’re going to have is what is the best way to take those distributions? We have a lot of clients who will ask, they’ll say, “Should I take that monthly? Should I take it quarterly or should I wait until the very last minute of the year and take it in December?” And there’s lots of different rationale around that as to why they ask that question. So we’re going to kind of delve into that and say, what is the best, what are the options? And by the way, I’m going to tell you this right up front. There is no best, it’s just a difference in mentality. And so we’ll kind of talk you through that just so you’ve got a good idea.
	But before we do that, we just want to remind you of what required minimum distributions are and the rules. So big picture, required minimum distributions, it is the amount that the US tax law requires that a person begins taking out of their traditional, and when I say the word traditional, that means tax deferred accounts. So this kind of is all encompassing. This is our IRAs, our SEP IRAs, our 401(k)s, 403(b)s, 457s, anything that I deferred my income on or put it over into these qualified plans. What the government says is, hey, you can defer, but you can’t defer forever on all of the dollars. What they say is, after a period of time when we hit a certain age bracket, and Murs is going to go through all that with us, we have to start taking out a minimum distribution.
	Now, we’re not today going to go through the numbers on what those minimum distributions are. We’re really just talking about the rule base, but basically there’s a percentage that they say we need to take out. If you wanted to get a really rough number, it’s around 3.5% when you begin taking that required minimum distribution out. Do not take that as the absolute. It is depending upon your age and there’s a formula behind it. But, Murs, could you take us through the rule aspect so that somebody would know if they’re sitting there today and they’re going, wait a minute, I’m 60 or I’m 65, or maybe I’m 70. When do I have to start taking this distribution?
Murs Tariq:	Yeah. And I think it’s important to understand even if you’re in your early 60s or even in your 50s, understanding when you have to start taking those required minimum distributions is going to be key to developing a plan and a strategy around those. Because once you hit that certain age that I’m about to go over, then you’re forced to take these withdrawals. And there are things that we talk to with clients about, well, do we want to be forced to at that point or do we want to start working on that earlier utilizing different types of strategies?
	But when it comes to the required minimum distribution, this is before the SECURE Act, before the pandemic era back in 2020, it used to be that once you turn the age of 70 and a half, and don’t ask me why the IRS picked half, but they picked 70 and a half, so once you turn the age of 70 and a half, and it’s really in the calendar year which you turn 70 and a half. So, for example, if you turn 70 and a half in June of the year, it’s really, that means that June of the year of say 2023, it meant that in 2023 is when you start taking your distributions. So it’s not specific to the month in which you turn 70 and a half, it’s the year in which you turn 70 half.
	All that to say none of that matters anymore because once the SECURE Act came out, there was some movement in what that age became. And so, it was 70 and a half. Now it is age 73 to 75, depending on your birth year. So for anyone that was born between 1951 and 1959, your RMD age has been pushed back to age 73. For anyone that is born in 1960 and onwards, your RMD age has been pushed back to age 75. So the calendar year in which you turn 73 or 75, depending on which bracket you are in, is when you are going to be forced to start taking those withdrawals and pay taxes on those withdrawals.
	So understanding that is key to start planning around a withdrawal strategy, which then kind of leads us into, a lot of times we get the question of, well, how do I take it? When do I take it? What is the opportune time? And we’ll get into that. A caveat that I’d want to bring up here real quick is that on Roth IRAs, it’s a tax-free bucket that we can utilize for retirement planning. You put money in after tax and once it’s in that Roth environment, it grows tax-free. So that statement alone is very powerful. The other nice piece about Roth IRAs is that once it’s in there, there is no RMD requirement. There is no forced distribution of those assets while you are living. So another powerful piece of what that is, in all essence, it puts you back in control of how you’re going to withdraw in your retirement years.
Radon Stancil:	I do want to just add one thing, Murs, because what Murs said was 100% accurate in that the year you turn, whether it be 72, 73 or 75, depending upon their dates of birth, you are required to take minimum distributions for that year. But if you’re doing research, you’re going to say, wait a minute, what’s this whole April 1st of the following year?
	So in the first year, what the IRS or the government says is that you can defer that first year of distribution and take it the next year by April 1st. We almost never, there are a few cases where we’ll say defer, especially if somebody was a real high income earner and that final year they’ve got a big distribution, we might defer it. But here’s the little gotcha on that: I can defer that first year to April 1st of the following year, but I still have to take my required minimum distribution for the next year, that year. So if I defer that second year, I’m going to have two distributions stacked on top of each other. So if I’m just sitting here in retirement, I most of the time don’t want to do that, because that pushes my tax bracket up. I just wanted to make sure because some might read that and go, what’s this whole April 1st thing?
Murs Tariq:	Yeah, and that’s a good point and it’s rare that it happens that we wait till April 1st, but that is the technical rule that you can actually wait till April 1st. Most of our clients are operating under the take it by the end of the calendar year. Also in the 401(k)s, the 403(b)s, those are also going to be subject to required minimum distributions as well. They are treated independently of IRAs, so you don’t need to fully understand that yet. But if you are in that age and you have IRAs and you have 401(k)s and 403(b)s, you definitely want to be talking to your financial advisor as to how to make sure you do everything properly here because we’ve seen mistakes happen there.
	Another category of an investment account is an inherited IRA. This is something that was driven through the beneficiary form at some point. So maybe you had a parent that passed away, they left you some IRA money, and now you transition that into an inherited IRA. The old rule, again, was that you got to take those distributions over your lifetime, which could be stretched out for years and years and years. And actually the slaying term of what that was called was the stretch IRA. And now today, the new rule also done by the SECURE Act back in 2020 is that now instead of being able to stretch your required minimum distributions on your inherited IRA over your lifetime, now you are limited to 10 years.
	A key difference here is that there was a specific formula back then as to how much you had to take out. Under the new rule there is no formula anymore. It’s really what they care about is you have to take it out over 10 years. You can take out as much or as little as you want over those 10 years, but by year 10, that entire account has to be cleaned out. There are a couple caveats to that rule. Again, if you’re working with someone, you definitely want to be understanding if you inherit assets, you want to be asking the question of how am I supposed to deplete this account? But that’s the general terms of a 10-year rule.
Radon Stancil:	Also, you might read that there’s a penalty if you don’t take these required minimum distributions, and that penalty is pretty hefty. Let’s just call it around 50% of a penalty, but don’t worry about that. If you’ve missed a required minimum distribution, it’s better just to get called up. Most of the time that penalty is waived. We’ve never seen anybody actually have to pay that. The whole thing is the government’s just basically saying, we want you to take it and take that distribution.
	Okay, so now we’re going to segue over into really the purpose of this particular podcast. Now we understand what required minimum distributions are. We understand kind of the age time of when I’ve got to start it. So now the question comes down to is it better to take it monthly, quarterly, or annual? So I’m going to give you the high level and then we’re going to walk you through each of these.
	But the reason why somebody’s asking that question is, is it kind of comes around this idea of, well, if I let it sit in there, it could grow. And so if I let it grow, then I could take it out at the end of the year. Another person might say, “Well, if I take it out now and the market falls, well, at least I got it out when the market was high.” I mean, there could be all kinds of scenarios around that. So let’s just take it one at a time and we’re going to kind of do advantages and a possible disadvantage because there’s never a perfect scenario. So let’s just start with monthly and let’s just kind of talk through that. So, Murs, can you talk us through some of the potential advantages of monthly?
Murs Tariq:	Yeah, so I think the biggest advantage of taking it monthly is going to be, it’s consistent cashflow, you know it’s coming in just like a paycheck. So let’s say your RMD for the year is $12,000. Well, you know that your monthly paycheck, depending on whether or not you’re, let’s just assume not withholding any taxes, is $1,000 a month coming in the door. So that helps significantly with someone that you’ve got social security coming in the door, you’ve got pension, and now you’ve got a consistent paycheck that you’re paying yourself every single month. That helps tremendously with budgeting and just understanding your cashflow and how much you can spend throughout retirement.
	So I think that is a significant advantage. I think actually in most cases it trumps the next advantage, which is market volatility. And this can go in both ways. It’s an advantage. It’s also a potential disadvantage where if you’re taking monthly a distribution out of your market investments, it could be that you’re withdrawing that $1,000 a month when the account is down a percent. It could be you’re withdrawing that $1,000 a month when the account is up a percent for that month. So one month it was a disadvantage, the other month it was an advantage to withdraw while the account was up.
	What becomes a more difficult scenario, and we’ll get into this a little bit, is if you have a consistently down market where you’re withdrawing over a period of time where the market is continuing to fall and you’re withdrawing that $1,000 a month, well, that can become an issue. And we’ll talk about strategies around how we mitigate that with our different various buckets. But the main advantages are going to be cashflow consistency, and you can mitigate the market volatility a little bit because you’re not trying to time the market. You’re just saying, every single month I’m going to take it up or down, up or down. And those were the advantages can be.
Radon Stancil:	Yeah, and then a disadvantage is almost the exact opposite of what Murs said. I’m taking money out and the market’s consistently going up and I’m missing out on those opportunities. Again, we’re going to take a minute here and decide this. I did want to make this one point though. Murs just gave an example of what if you’re required minimum distribution is $12,000 and you might think, well, does that vary throughout the year based on what’s going on? Here’s the thing: the IRS basically says your required minimum distribution is calculated on whatever the balance of the IRA was on December 31st of the previous year. So my required minimum distribution is set before January, so I’ve got to take that 12,000 out no matter what’s happening in my amount of money that I’ve got to take out of the IRA.
	Now, I do want us just to go ahead, Murs, and let’s just go ahead and talk about this for a second. We talk about our three-bucket strategy. We talk about three buckets, a cash bucket, an income safety bucket, and then our growth bucket. And I just want to have you talk a little bit, Murs, about the advantage of having both of those, and we’ll talk about both of those scenarios, a declining market and increasing market, the flexibility we have if we’ve got an income safety bucket and a growth bucket.
Murs Tariq:	So in a high level, the income safety bucket is designed to do exactly what it is. It’s there to provide income, but it also is there to protect against the volatility of the stock market. This bucket is typically not correlated to the stock market. So, if the market’s down, this bucket is not down, that’s what we like about it. What it brings is predictability to our withdrawal strategy and it also, now let’s talk about the growth bucket, it offsets some of the risk of the growth bucket. The growth bucket in all essence is the stock market. A lot of us have spent a lot of time in the stock market, so you know that it can go up and down, have some major swings. Last year the markets in 2022 were down 20 to 30%, depending on which index you look at. In the pandemic we had some major swings and that is going to be something that we will consistently see over time. That’s just how the market works.
	And so the whole premise of these two buckets working together is that, well, if we have an up year, and if we’re taking the bulk of our withdrawals from the safety or income bucket, the way I say it is that we’re not bugging the growth bucket. So let’s say the market is ripping and roaring going up, we’re not taking it back by having to take our $1,000 a month out of that growth bucket. So it’s really allowing it to take the power of cumulative growth over time. If we’re taking all of our required minimum distributions from the safety bucket, which is, again, not correlated to the stock market, it’s not going to go below zero from a market return perspective, it makes things way more predictable.
	On the flip side, if we are in a down market, again, the safety bucket is not down, so our income is still the same and our withdrawal percentage is still the same as well. So we’re not putting ourselves in a scenario of withdrawing on a down asset because of the market being down. Now, what that allows us is it buys us time. Anyone that talks about the stock market, in a lot of ways, unless you’re a day trader, you need to look at the stock market as a long-term investment vehicle.
	So if we are providing income out of a place that is not affected by the stock market and we go into a year like 2022 where the S&P was down around 20%, the NASDAQ was down around 30%, your market portfolio is down somewhere in that range, well, the beauty of the safety bucket, our income is provided and now the growth bucket, we bought it some time for it to now recover and recuperate. And whether that takes a year or two or five years like we’ve seen in the past, our income is covered. And so we’re not tapping into it, we’re not bugging it every single month to create that paycheck that we’re going to need to live off of. Now, if all of your money is in this growth bucket, well, then there’s things that you may want to be thinking about when it comes to, well, how am I aligned, especially when it comes time for me to start withdrawing on these assets?
Radon Stancil:	And just one thing I want to mention here in case you’re thinking this through. RMDs, require minimum distribution, is based on the totality of your IRAs, but you do not have to take it out of each account. So go to a person who has a million dollars in an IRA and they put 50% over in the income bucket that Murs was just talking about and 50% in the growth bucket. I can take all of my distribution for the whole entire million dollars over out of the income bucket and let the growth bucket sit there. So the IRS says that I can do that. There’s only one little side point to this. Money in a 401(k), the distribution has to come from the 401(k). It cannot be cumulative. So, again, if I have the opportunity, it gives me more flexibility to get money out of the 401(k) and go to an IRA than to sit in the 401(k) in a lot of cases. So I just wanted to mention that.
	All right, let’s hit the quarterly. I’m just going to hit this one real quick and then I want you to talk about the annual. The quarterly is, if you want to call it, it’s kind of a middle of the road. I’m kind of going to this idea I’m going to let the money sit there a little bit longer and just see what happens in the market instead of doing a monthly deal that kind of gives me this dollar cost averaging kind of thing where I’m taking money out incrementally. The quarter is kind of the middle of the road, in between, doing monthly and annual. Super simple. The advantage, disadvantage, very similar to the monthly. It’s just this real nice, easy way to say, “I don’t know which way I want to go. Let’s just do quarterly.” We tend to always kind of be in two categories. It’s either monthly or it’s annual. We have very, very few, if any, clients doing quarterly. So let’s just go hit the annual one real quick, Murs, and walk through here what our advantage, disadvantage is.
Murs Tariq:	So this will come back to what you said, Radon, at the beginning was we have some clients that say, “I want to leave my money invested as long as possible. So let me wait and take my required minimum distribution lump sum on, say, December 1st before the year turns over.” And that can work at times. You can have a year where the markets are up and you get to benefit from waiting on that withdrawal. But on the flip side, the disadvantage is, well, it’s still market timing. You’re kind of hoping that the market’s up by the time you take the withdrawal, and we can easily be in a scenario where the market is down and now, go back to what Radon said, the dollar amount, because the market is down in the calendar year, your RMD has not changed. It was based off of the previous year’s numbers. So your RMD, if the market is down, becomes a bigger percentage of what your account value is. So, it could affect you negatively as well.
	Again, what I come back to is that it really comes down to personal preference on this, whether it’s monthly, quarterly, or annually. And I think really personal preference of cashflow. Do I need the monthly paycheck or do I not need my required minimum distribution at all? Am I really just withdrawing it and reinvesting it? All of those types of questions are going to help you decide which one is better for you. At the end of the day, it comes back to how it’s going to work best in your own personal retirement and withdrawal strategy. Like Radon said at the beginning, there is no perfect way to do this. It’s all about understanding the why behind what you are doing.
Radon Stancil:	Yeah, what we do, and we say this all the time on these podcasts, this is general talk, this is understanding the rules, but if you really want to know your specific situation, you need to have what we call a retirement-focused financial plan that includes an income plan, that includes required minimum distribution planning. And we do this for all of our clients. So if our client, if you’re listening to this or if you’re not a client, it’s okay, we can walk you through how this looks. So if you’re listening to this and you’re going, “Wait a minute, I need to check up on this because I need to understand it,” then feel free to reach out to us. If you go to our website, you go to the top right-hand corner, you click on schedule call. Our schedule comes up, it’s a 15-minute time slot, but at least it gives us an opportunity to talk and we can always schedule further discussions after that. So feel free to take advantage of that if you’re listening to this podcast.
	I also want to remind you, as I always do, we went through a lot of numbers, a lot of information. We have a blog article written on this particular topic. You can go get that on our website as well, which is pomwealth.net. Go to the blog page, which is /blog, and you’ll have all of the information and details. Thank you very much. We hope this has been helpful. We’ll talk to you again next week.