An important factor is what you plan to do with the money once it is out of your IRA
Dear Dan,
I usually take my required minimum distribution from my IRA early in the year so I don’t have to worry about it later. The woman I’m dating says I should wait until later in the year so my money can earn more interest. Is a few months’ interest really worth it?
Interested in Fort Lauderdale
Dear Interested,
Most of the time it is worth it. An important factor is what you plan to do with the money once it is out of your IRA. If you intend to spend it soon after taking the distribution, waiting until late in the year can earn you a little more.
However, if you take the RMD early in the year and are saving the money rather than spending it, you can still earn interest on those funds after they come out of the IRA. So based solely on the ability to earn interest, the difference between taking early versus late is sometimes not significant. However, the size of the RMDs, the time horizon and how the funds are invested all affect the calculus. All that means there is no one universal best time to take your RMD.
If the money will be used to pay bills, fund a vacation or give as gifts to family or friends, most people will simply take the RMD when they need the funds. If the money is not needed immediately, on the other hand, one common scenario is more easily managed by waiting.
Many retired clients wish to minimize their tax liability for the year by taking the exact amount of their RMD and not a penny more. For people who also give to charity, properly making qualified charitable distributions can lower their tax bill even further, and timing can matter.
For example, say your RMD is $50,000 and you wish to give $10,000 to your alma mater. If you take your $50,000 RMD and then cut a check to the school, you will report $50,000 in income and will only be able to deduct the $10,000 if you have enough itemized deductions. But if you instead donate to the school via a qualified charitable distribution, you will only report $40,000 of income, regardless of whether you itemize.
It doesn’t matter when exactly or how frequently withdrawals are made during the year. The IRS simply wants to see that the total cumulative amount distributed meets or exceeds the minimum. Waiting until year-end to complete the RMD gives you more flexibility. We have also found that by the end of the year, charitable intent often differs from what it was at the beginning of the year.
Let’s stick with our example and say you made the $10,000 qualified charitable distribution to your alma mater and paid out the remaining $40,000 to yourself at the beginning of the year. Then in the fall, you realize you want to donate $10,000 to your church’s new building campaign. You can certainly do that using a qualified charitable distribution, and the entire $10,000 will be excluded from your income. However, the $40,000 in reportable income is not reduced. Had you waited to take the RMD until year-end, when the opportunity to support your church arose, you could have made the additional qualified charitable distribution and only needed to take $30,000 for yourself to complete the RMD.
The reason the $40,000 of reportable income is not affected by the church donation later in the year is that by rule, the first dollars out of an IRA are deemed to be part of the RMD. So, the first $50,000 out, regardless of what is done with it, is counted toward the RMD. Since an RMD cannot be rolled over, it cannot be returned to the IRA.
One word of caution on waiting until the end of the year: Don’t wait too long. If any of the transactions you need to make are delayed, you could fail to meet your RMD and will have to take the extra time to correct the issue and pay a penalty.
If you have a question for Dan, please email him with ‘MarketWatch Q&A’ in the subject line.
Originally published on MarketWatch. Read the original article here.