All things being equal, the only thing that matters is your tax rate now versus your future tax rate.
Funds taken from deferred accounts are taxed as ordinary income. In the US, the tax rate on ordinary income has almost always been higher than the tax rate on long term capital gains.
Over time, markets tend to rise. Therefore, for the long term investor it’s generally best to invest earlier in the year than later.
Therefore, it seems to me that waiting to take an RMD will generally cause a greater amount of capital appreciation to eventually be taxed at ordinary income rates. Conversely, if an RMD is taken earlier, then the amount can be reinvested in a taxable account thereby allowing growth to eventually be taxed at lower capital gains rates (and it will also afford greater potential for tax-loss harvesting along the way).
If, however, one is using RMD to make their estimated tax payments (via tax withholding), then waiting may make sense since tax withholdings are assumed by the IRS to be paid equally throughout the year.
Tax estimates can be calculated one of three ways. Those ways are:
1. Based on the previous year’s tax
2. Based on current year actual tax
3. Based on the annualized income method
If a taxpayer is paying tax on the annualized income method, then taking an RMD early will cause inflated required estimated tax payments throughout the year. Very few taxpayers use the annualized income method, however.
A taxpayer that dies during the year must still take that year’s RMD. Additionally, Income in Respect of Descendant (IRD) accounts do not receive a basis step-up upon the death of the account owner. Therefore, estate planning is generally a not really an issue here (except at the extreme margin).
The type of reinvestment (bonds or equities) to be made with the RMD also matters (capital appreciation is generally less of an issue with bonds). Additionally, if the account owner intends to spend his RMD, then taking it later might make the most sense.
We have a different story if one intends to donate their RMD to charity, however. Since markets tend to rise over time, it’s generally preferred to not make the donation until later in the year. This allows the IRD account a higher probability of growth until the set QCD amount is finally distributed. You should also note that QCDs must be paid directly to charity. If one takes an RMD, deposits the amount to their taxable account, and then makes a charitable contribution, you will have increased your AGI which can cause all sorts of tax implications. It’s much better to short-circuit the potential AGI issues by making the QCD directly to charity.
1. If going to spend the RMD, then it might be better to wait
2. If using the RMD to satisfy estimated tax payments, then it might be better to wait
3. If investing the RMD in equities, then it’s probably better to take early since long term capital gains are taxed at lower rates than ordinary income AND the high volatility of equities may also afford tax-loss harvesting opportunities
4. If investing the RMD in bonds, then “meh”
5. If using QCD option, then it’s probably better to wait
6. If using the annualized income method for calculating required estimated tax payments, then it depends
Are there any considerations I’ve missed or gotten wrong here?