Retirement accounts are considered an effective method for saving toward retirement, providing both a way to save and a tax advantage. Accounts such as 401(k)s and traditional IRAs offer upfront tax savings by reducing taxable income for the year contributions are made. However, this deferral means taxes will be due on withdrawals during retirement.
To prevent individuals from neglecting withdrawals to avoid taxes, the IRS mandates required minimum distributions (RMDs). For those who must or will soon begin taking RMDs and are contemplating a withdrawal in May, the optimal timing depends on individual circumstances.
### Calculating Required Minimum Distributions
RMDs are specific amounts that must be withdrawn from tax-deferred retirement accounts by December 31 each year, beginning at age 73. An exception exists for the first year, allowing until April 1 of the following year. Calculating RMDs involves three steps:
1. Determine the account balance at the end of the previous year.
2. Identify the life expectancy factor (LEF) for the person’s age and marital status, as provided by the IRS.
3. Divide the account balance by the LEF.
For instance, for a single individual with $500,000 in a retirement account at the end of 2024, RMDs are calculated as follows:
| Age | Life Expectancy Factor | Required Minimum Distribution |
|—–|———————-|——————————-|
| 73 | 26.5 | $18,868 |
| 74 | 25.5 | $19,608 |
| 75 | 24.6 | $20,325 |
| 76 | 23.7 | $21,097 |
| 77 | 22.9 | $21,834 |
| 78 | 22.0 | $22,727 |
| 79 | 21.1 | $23,697 |
| 80 | 20.2 | $24,752 |
### Consequences of Missing an RMD
Failing to take the RMD results in a penalty of 25% of the amount not withdrawn. For example, if a 75-year-old withdraws only $15,325 instead of $20,325, a penalty of $1,250 applies. However, rectifying the error within two years can reduce the penalty to 10%, resulting in a $500 penalty for the same scenario. Remaining vigilant about RMD obligations is crucial to avoid penalties.
### Should RMDs Be Taken in May?
There is flexibility in timing for RMDs, as long as they are completed by year-end. Individuals may choose to withdraw early, wait until year-end, or spread withdrawals throughout the year. The best time depends on personal financial needs and market conditions. For those in need of cash or wanting to avoid last-minute stress, May may be suitable. Conversely, market volatility might make May less favorable for large withdrawals.
The market’s short-term performance is unpredictable, featuring fluctuations throughout the year. Distributing RMDs evenly may help mitigate the risk of selling assets at a loss during downturns. Amid current uncertainties, this strategy appears prudent for retirees.
