If you’re due to take a Required Minimum Distribution (RMD) this year, it must be drawn by December 31 to prevent substantial IRS fines. The full amount can be withdrawn gradually or in one large sum, but it must be fully withdrawn by the end of the year.
Many retirees who don't urgently require their RMDs often defer until December, allowing their funds to appreciate tax-deferred for as long as possible. While this tactic usually works, it may not be the optimal strategy given the projected rate cuts by the Federal Reserve.
The Federal Reserve is reportedly going to reduce rates soon, which could result in lower yields if you delay your RMD. This could potentially cause you to miss out on today's stronger yields, including those offered by high-paying Certificates of Deposit (CDs). Withdrawing your RMD earlier could give you the opportunity to secure a higher return before the rates fall.
Taking out your RMD early allows you to move your funds into a CD that locks in current high yields. As inflation is still a concern, earning a substantial return helps maintain the purchasing power of your savings. With the anticipated rate cut by the Federal Reserve, locking in high rates soon on a CD could be an intelligent move as it provides a guaranteed return unchanging by rate drops.
CD rates could lower across banks and credit unions following an interest rate cut, and desired CD offers could disappear before an official rate move is announced. It's advisable to secure a good CD offer while it's available, but remember that means committing your funds for the full term, and early withdrawal might attract penalties.
If locking your entire RMD into a CD isn't appealing, high-yield savings accounts are also a good avenue for substantial returns, with some currently yielding up to 5.00%. These accounts offer liquidity for your funds whenever needed. High-yield money market accounts may also be a good fit as they provide added flexibility while offering substantial returns, although their returns often lag behind savings accounts.
Remember that unlike CDs, savings and money market accounts offer variable yields-the APY can decrease once the Federal Reserve starts cutting its benchmark rate. As such, even if you're not in immediate need of your RMD funds, early withdrawal could still be beneficial by allowing you to secure higher yields on cash while they are still available. If rates fall soon, you will certainly appreciate having locked in the current high yields.