Why You May Want to Avoid Automating Your RMDs

Key Points

• Automating RMDs may be convenient, but it's not for everyone.

• If your financial situation is complex and your portfolio is stuffed full of different investment types, you may feel more confident making withdrawals on your own (or with the help of a financial planner).

• Being hands-on could be the right choice during times of market upheaval when you want to limit the amount you withdraw.

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Sometime in your early 70s (depending on the year you were born), you must begin withdrawing money from certain retirement accounts, including traditional IRA, 401(k), 403(b), and 457(b) plans, and there's no denying the advantages of automating required minimum distributions (RMDs). For example, automating withdrawals can simplify your life, reduce the odds of human error, and give you peace of mind. However, automating is not for everyone.

If any of the following situations apply, you may want to skip automating your RMDs.

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Your financial situation is complex

Not everyone has a straightforward portfolio. Your portfolio may include multiple accounts and dozens of different investment types, and your estate plan may also be more complex than most. If this sounds like you, think twice about automating. It's not that automation can't work, but an automated system may not account for the many facets of your portfolio, a situation that can complicate compliance.

The market has become volatile

If you're retired or nearing retirement, chances are you've been around long enough to know the market goes up, and the market comes down. Sometimes the ups and downs are dramatic, and sometimes as gentle as a breeze. It all depends on the day (and time).

In times of significant market fluctuations, you may want the ability to adjust your withdrawals manually. Here's why: The worst time to withdraw is when the value of your assets is down, and you must sell more to withdraw the amount of money you need. The best solution is to have another source of cash you can access rather than sell at a low price.

It's important to understand, though, that you still have to take RMDs at some point during the year. Nevertheless, if you're planning to withdraw more than your RMD amount, your best bet might be to take the extra from another account or to postpone whatever it is you need the extra money for until the market (and your portfolio) rebound.

You've recently experienced a significant life change

If there's one thing you can depend on in life, it's change. For example, you may have family members move in with you and find that you need to withdraw more than expected from your retirement account. You may become ill and need a larger withdrawal to cover medical costs.

Changes don't necessarily have to be negative. You may have inherited money and don't need a withdrawal as large as expected. Or, you were recently married and want to coordinate your withdrawals with those of your new spouse.

It's possible that an automated RMD won't allow for timely adjustments based on the changes you're experiencing.

You tend to be a worrywart

If you feel anxious about counting on an automated system rather than making RMDs independently, automation may not be for you. Let's say you're concerned that a computerized system won't adapt to changes in tax laws quickly enough to ensure you comply. If you're more comfortable handling RMDs independently, that's a good enough reason to avoid automation.

You prefer the hands-on approach

For some retirees, the hands-on approach is the only way to go. If you prefer to have control over each distribution, automating is not for you. If your withdrawals vary based on tax strategies, spending needs, or for any other reason, doing it yourself may be the way to go.

Automation may be the perfect option for the retiree who wants to "set it and forget it," but if that's not you, that's OK. Fortunately, you can still do it yourself.

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