A (Green) Thumb on Your 401k’s Required Minimum Distribution
When my maternal grandmother passed away, my mom planted a very special rose bush, the Double Delight hybrid tea rose. Some years later my parents were moving, but my mom could not leave what felt like a piece of her mother behind, so she snipped a few branches to bring with her and, with no fanfare, stabbed them into the ground at their new home. They bloomed with greater ferocity than in her previous home. This is my mom’s green thumb. Maybe you are like her or perhaps you feel my pain that apparently a green thumb is not genetic. I killed a cactus last summer. I keep trying though.
I recently planted basil for the 4,769,528th time and so far am still successfully snipping what I need and the plant keeps producing or at least staying alive, though it does so much better when I leave it alone to grow.
Plants are often used in financial marketing because of this concept of growth, but there are other plant-inspired metaphors like paring your financial tree (rebalancing), or snipping for use (withdrawals). How does your [financial] garden grow? Working in the 401k world for nearly a quarter of a century has allowed me to observe human behavior and monetary reactions, not just from education, but learn in real time the patterns on repeat. The retirement experts extolling our audience to please not touch your retirement, grow it, baby, grow it, while the audience asks “how can I take it out to pay off my car *cough my vacation*?”
There is this term in our 401k-nerd world called “leakage” and it refers to money leaving the retirement account system (either you are withdrawing it, or you’re forgetting it exists and it hangs out there unclaimed). It’s a proverbial bummer. The 401k is a phenomenal tool to grow your money, but it doesn’t work the same if you keep pulling money out or never replenish it.
There will be a time when, using a formula, the IRS will require you to withdraw an at-least-this-much amount of pre-tax* money out of your 401k. This required withdrawal is flatly called a “Required Minimum Distribution” or “RMD.” Basically, you can pull more, but you cannot pull less than this RMD amount.
Most people will, in one swoop, take their minimum amount (or more) and dump it in their checking account. There is another trick up your sleeve though. You may be able to take your RMD amount incrementally throughout the year (monthly or quarterly perhaps) instead of the whole shebang by the deadline. Doing it incrementally keeps the money out of your checking account for longer. Behaviorally, it is easier not to spend the money if it is not accessible. Trick no. 2 is if you do opt for installments of your RMD (and if you don’t need it to live on), to invest that RMD money into a brokerage account giving you the benefit of dollar-cost averaging because you will be incrementally purchasing investments rather than one lump sum.
Installments are not right for everyone. Ultimately, there are two things to remember:
Make it easy for yourself to succeed
Make sure you take your RMD by the deadline
This was light fare in terms of food for thought on the idea of incrementally taking your Required Minimum Distribution, so like any other idea I share, it is simply an idea. I find that having many tricks up my sleeve means I have more tools to work with when the need strikes. Always align action with what is right for you and your goals.
*Observe: RMD applies to Pre-tax. So Roth monies are not subject to this RMD. If you want to avoid being forced to take withdrawals, then that is another mark for you on team Roth.
