Boring for many, I love these year-end opportunities for financial optimization. Year-end is a great time of year for something else I love –football! With college football bowl season about to begin and NFL playoffs around the corner, the action on the field is as intense as ever. And while the on-field action is all good and dandy, I always get a kick out of the “coach speak” and endless clichés heard from coaches dancing around uncomfortable questions posed by their adversaries in the media this time of year.

Admittedly, comparing RMDs and football may be a “stretch”, but I promise this won’t be an exercise in futility. With that, let’s put our visor on, grab the clipboard, and break down everything you need to know about RMDs from the sidelines. Before we begin, it should be noted that this post will only focus on standard RMDs and will not be tackling Inherited RMDs, which have slightly different rules.

Blocking and Tackling

Understand the Basics

What coach doesn’t preach the fundamentals? For starters, RMD is the common acronym for Required Minimum Distribution, which is the government’s requirement that anyone with money saved in their tax-deferred account (e.g. 401k or IRA), take a yearly distribution starting at age 70.5. You can always withdraw more than the minimum amount, but remember all distributions qualify as income, and are taxed at the ordinary income tax rates.

When do they start?

RMDs “kickoff” at age 70.5 and the individual has until April 1^st of the following year to take the first withdrawal. Going forward, every RMD must be taken annually by December 31^st.  Even though you can elect to take your first and second RMDs in the same year, spreading out the distributions over two years may minimize total taxes paid. You should consult with a qualified advisor to see if it makes sense for you.

How are RMDs calculated?

The RMD amount is based on your age and your year-end account balance the previous year. For determining your RMD amount, you can use the IRS’s worksheet or use one of the many online calculators (here’s Schwab’s). Though many custodians will help calculate the amount, it’s important to note that it’s the tax payers responsibility to ensure the correct amount is distributed each year.

Are there penalties?

Missing an RMD won’t lose the game for you, but it will make winning more difficult. If you don’t take your RMD on time or don’t withdraw enough, the IRS penalty may be equal to 50% of the amount not distributed. For a $1mm IRA, that could mean up to an $18k penalty for not taking your own money.

Do the little things right

Since 2002, the New England Patriots have experienced unparalleled success by winning 5 NFL championships and contending for many more. So, what’s the secret to their success? The easy answer is their celebrity quarterback or charismatic coach. But any NFL insider will tell you it’s their attention to detail. Similarly, while cliché, when it comes to RMDs, executing the small stuff can help build and maintain your wealth over time. Let’s review a few areas to optimize:

Take “In-Kind” Distributions – If your cash flow situation is such that you don’t have immediate need for the cash, consider transferring securities (e.g. stocks or mutual funds) out of your IRA into a taxable brokerage account “in-kind.” This form of hand-off will allow you to avoid transaction costs and maintain your asset allocation, while avoiding the opportunity costs that come from being out of the market.

Delay distributions until year-end – Consider this a form of “milking the play clock.” The logic here is simple, take advantage of the tax-deferred treatment as long as possible. This means taking the withdrawals in December, not January or February. This is straightforward for those that don’t need the cash to support their lifestyle. For the majority that do need the cash, this is a more complex and requires coordination between your cash flow needs and resources.