Advantages of Automating Your RMDs (Required Minimum Distributions) in Retirement

Key Points

You may not realize it, but some tax-advantaged retirement accounts such as traditional IRAs, SEP IRAs, and SIMPLE IRAs, will require that you take Required Minimum Distributions (RMDs) once you reach the age of 73. This applies to some 401(k) plans, too, though if you’re still working at age 73, you can delay. It generally doesn’t apply to Roth accounts.

There are a lot of good reasons to automate your RMDs, and reasons why you might not want to do so. Let’s review them.

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Some important things to know about Required Minimum Distributions

Before we start discussing automation, here are a few things to keep in mind about RMDs:

• You have until April 1 of the year after you turn 73 to take your first RMD. After that, though, the deadlines fall on Dec. 31. So your second RMD will be due on Dec. 31 of the year you turn 74. It’s often smart to take your first RMD in the year you turn 73 — to avoid having to take both your first and second RMD in the year you turn 74, which can boost your taxable income a lot for that year.
• Your RMDs will count as taxable income to you — so plan for it when you’re coming up with your retirement plan.
• If you fail to take your full RMD on time, you’ll pay. The penalty for not taking them on time is 25% of the amount you failed to withdraw on time. (You may be able to pay a smaller penalty if you notice that you just missed the deadline and take action quickly.) This is one of several common RMD mistakes.
• If you want to donate to a charity, you may be able to avoid being taxed on some or all of your RMD by executing a “qualified charitable distribution” (QCD). This involves having the funds sent directly from your retirement account to a qualifying charity. (There are some more rules, too.)

Automating your RMD

You can calculate your RMD by referring to an RMD table, but many good brokerages will calculate your RMDs for you and will often let you set up automatic withdrawals. So, should you automate your RMDs? Here are advantages of doing so:

• Your brokerage will do the work for you, calculating the correct amount and withdrawing it. You do need to set up the automation, though, and it’s not a bad idea to double-check that it’s been done each year, before the deadline.
• You may be able to have your RMD taken out on a monthly or quarterly basis, which can provide some regular income to you in retirement instead of awaiting an annual lump sum.
• Automating can reduce your stress or pressure, since it’s so important to not be late taking your RMDs.
• You may be able to automate further, by having your brokerage not only withdraw the correct amount but also route that sum to an account you specify.
• Automating RMDs can make life easier if you have multiple retirement accounts that require them.
• A chief benefit is that once you set it and forget it, you’ll escape those nasty penalties. (Though, again, I myself like to double-check.)

Why you might not automate your RMDs

Of course, automation isn’t perfect for everyone at every time. You might not want to automate if:

• You want ultimate control, choosing exactly when to make your withdrawal each year.
• Your investments are volatile, fluctuating widely. Note, though, that we’ve long recommended that any money you’ll need to withdraw within a few (if not 10, to be more conservative) years should not be in stocks, since the stock market can be volatile and you don’t want to have to withdraw at a bad time.
• Your income needs are varying widely. For example, if you need a lot more income in a particular year, you might want to be withdrawing a lot more than your RMD. Of course, you can just make an additional withdrawal.

These reasons to not automate are not as compelling, in my opinion, as the reasons to automate. But think it through and make your own decision. Above all, do have a solid retirement plan in place. That will involve estimating how much income you’ll need in retirement and how you’ll get it. Never leave your retirement to chance.

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