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Dispatches Retired Investor

When Is the Best Time to Take Your RMDs?

To decide when to take your required minimum distribution (RMD), you’ll need to understand the pros and cons of making RMD withdrawals earlier or later in the year.

by Jenna Brashear | September 2017

Updated on July 27, 2022

The Internal Revenue Service (IRS) mandates that distributions be taken from tax-deferred accounts, such as traditional individual retirement accounts (IRAs), by December 31 of each calendar year for those subject to the required minimum distribution (RMD) rules. The IRS does not, however, state at what point during the calendar year those distributions must be taken. (A special one-time April 1 deadline exists for those who turn age 72 during the previous calendar year and have yet to begin taking their RMDs.)

This raises the question: When is the best time to take the RMDs? We’ll offer some suggestions, but first things first, let’s cover the basics.

What Is a Required Minimum Distribution (RMD)?

A required minimum distribution, commonly referred to as an RMD, is the annual minimum amount a retirement plan account owner must withdraw beginning in the year they reach age 72. You must withdraw this minimum out of your retirement account to avoid tax consequences. While no one likes being forced to withdraw savings, these accounts are designed to pay for retirement expenses and almost all accounts subject to the RMD rules were funded with pretax dollars. [Roth 401(k) accounts are subject to the RMD rules, but because they are funded with aftertax dollars no additional federal taxes are levied on their withdrawals.]

Did you know there’s a science to managing your asset allocation, RMDs and retirement portfolio? Check out how to apply your required minimum withdrawals to different allocations.

Who Takes RMDs?

RMDs must be taken by individuals when they reach 72 years old. An individual can delay the RMD if they retire after age 72. RMDs from defined-contribution plans, such as 401(k) plans, can be postponed beyond age 72 for those who are still working, contributing to a defined-contribution plan and own less than 5% of the company. Roth IRA plans are exempt from the RMD rules while the owner is alive.

Investors who are over the required age must withdraw the RMD amount every year based on the current RMD calculation.

Should I Space Out RMDs?

As an investor, you have the option to take your required minimum distributions in a lump sum once per year or take them at different points throughout the calendar year. There are advantages and disadvantages to both strategies. The strategy that you choose will ultimately depend on whether you need to use RMDs for regular income or if you’re taking them just to meet the minimum requirement.

Spacing withdrawals throughout the year eliminates the timing decision of when to take withdrawals. It also provides a stream of regular cash flows. Many brokerage, mutual fund and advisory firms can calculate and disburse withdrawals on a monthly, quarterly or semiannual basis. These automated payments eliminate the chance of accidentally missing a planned withdrawal.

When regular installments are taken throughout the year, they can simulate having a paycheck. This can assist with paying rent, a mortgage or other recurring expenses. Spacing out your RMDs may also help when the market is volatile to ensure that you’re not taking all of your annual RMD an inopportune time.

When to Take RMDs

Alarm clock amongst a pile of fall leaves

Establishing a fixed interval for when you will take your RMDs eliminates the behavioral error of trying to determine the “best time” to take your RMD. It also allows you to automate your distributions. Establishing automated withdrawals with your financial institution ensures that you will take the full RMD amount out every calendar year. The key is to ensure that the full RMD amount you are required to take for a calendar year—which can encompass several accounts—is taken no later than December 31. (If December 31 falls on a weekend, then the deadline would effectively be the last business day of the calendar year.)

If you’re interested in learning about which retirement calculators to use and which ones to avoid, check out our article highlighting the important differences.

Benefits of Taking RMDs Early in the Year

If you’re thinking about taking your RMDs early in the year, it’s important to evaluate the potential benefits.

Taking the distribution early in the year ensures that the deadline is met. It also alleviates the potential of dying before the year’s RMD is taken (which could cause problems for heirs) and leaves ample time to conduct a Roth IRA conversion, if desired.

If you are making a qualified charitable distribution (QCD) from your IRA, doing it early in the year can help to alleviate tax accounting headaches as well. Make the QCD prior to withdrawing any remaining RMD amount.

When the RMD is taken early in the year, potential positive returns for the current calendar year are forfeited, but potential losses are also avoided.

Benefits of Taking RMDs Late in the Year

On the other hand, postponing taking your RMD until near the end of the year allows you to maximize the returns and income from your investments. Any capital gains and income payments are tax-free. Combined, delaying can increase the portfolio’s compounded returns by allowing a greater sum of money to work for a longer period of time.

Waiting until December does incur the risk of negative returns, but on an annual basis stocks and bonds tend to have positive returns far more often than negative returns. Delaying too long can put a retiree dangerously close to the December 31 deadline, potentially leaving not enough time to complete a Roth IRA conversion, if desired.

Lastly, delaying too late in the year also leads to the possibility of dying before the current year’s RMD is taken. This puts the onus on the estate’s executor to ensure the RMD is met.

Benefits of a Flexible Approach to Taking RMDs

A third option is to incorporate a level of flexibility into when you take your RMDs. During months when the assets that your RMD is predominantly allocated to (e.g., stocks) have declined in price, you can postpone taking your planned RMD. Doing so gives those assets a bit of time to recover. Delaying also helps if you think current conditions aren’t the best for taking your RMD.

The key to this strategy is to have a set date by which you will take your RMD no matter what the market is doing, so that you are not penalized for failing to take the full amount by December 31. Failure to meet this deadline will result in a 50% tax on the RMD amount not withdrawn.

Retirement Planning and RMDs

Large highway sign that reads retirement just ahead

Whether you decide to take your RMDs at the beginning or end of the year, all at once or in installments, you want to make sure you are choosing the option that’s right for you. That means you should continually be monitoring your goals, risk tolerance, allocation and overall preferences.

Retirement planning doesn’t have to be a headache, especially with the right tools and resources to get you on the right track. Learn how to use A+ Investor’s robust suite of screening tools to find new stock and fund opportunities for your retirement portfolio.

Additional Resources About Required Minimum Distributions

Looking for additional resources and articles about required minimum distributions or retirement planning as a whole? Check out all of the great educational materials we have regarding RMDs to ensure you are making well-informed decisions about your future.

Source: “When’s the Right Time to Take RMDs?,” Christine Benz, Morningstar.com, August 10, 2017.

This article was originally published in the September 2017 AAII Journal. Click here for a PDF of the original article.

Discussion

Jack Wilkinson from OH posted over 8 years ago:

Article does not address tax consequences. Federal and state withholding should/must be done at time of withdraw. Waiting until December allows tax money withheld to grow.


G Smith from VA posted over 8 years ago:

Any gain obtained by waiting to take the RMD until the end of the year will be taxed as ordinary income. If the RMD is cashed out at the beginning of the year and then reinvested, the gain on the reinvested amount could qualify as capital gains or dividends and thereby be subject to lower tax rates. For taxpayers utilizing the "safe haven" option to paying estimated taxes, there would be no difference in paying estimated taxes as a consequence of taking the RMD early as opposed to taking it late in the year.


Robert Frank from CA posted over 8 years ago:

Why reprint the misleading information from Morningstar? Explain this one: "Any capital gains and income payments are tax free". It would indeed be rare that the withholding on an RMD reduces investment return for the remainder of the year; if you make estimated payments you just make lower estimated payments at that time of year.


Charles Rotblut from IL posted over 8 years ago:

Robert, All capital gains and dividend/interest income earned in an IRA are tax-free. The RMD, when you take it, is taxed. If the RMD is postponed to late in the year, the amount designated for withdrawal is exposed to the calendar year's returns up until the time you do take the withdrawal. -Charles


Warren W. from NC posted over 8 years ago:

In my view capital gains and dividend/interest income when realized within a traditional IRA are tax deferred until withdrawn, when they are subject to ordinary income tax rates. They are not tax free.


Paul D. from California posted over 8 years ago:

I would have to agree with Warren W. I see this nomenclature clash come up frequently. Tax-free for now, but pay the taxes later, to me, is tax DEFERRED. All income within an IRA is tax deferred. The point of waiting to take a fixed-amount RMD would be to let more gain, and possibly dividends, accrue in the tax deferred basket, to be withdrawn later, as taxable, of course.


Phil Morgan from VA posted over 8 years ago:

I find it interesting that the normal assumption is that if you leave the portfolio intact until the end of the year, the value will be higher. At some point this record bull market will head for a correction and if it happens at the end of an RMD year, an investor would probably regret not taking the funds earlier.


L Toll from CT posted over 8 years ago:

Many years I've been an IRA and Roth participant, but now because of the tax implications I now wonder if the simple IRA is actually beneficial. Better to make good long-term investments in a brokerage acct. to: avoid ordinary income tax rate on all long-term profits, ability to write off losses, not be forced into RMDs raising the AGI at inopportune time? Roth is better. Am I wrong?


Michael Mcconihe from FL posted over 8 years ago:

I like to take the RMD early in the new year. I assume the IRA will go up during the year meaning I MUST take out more (and pay taxes on that amount) whereas early withdrawal means I take less out. The key is to immediately 1) reinvest the RMD long term and let it keep growing forever; 2) give to someone who pays little or no tax like a poor child, 3) spend it on a great vacation before you die rather than afterwards!


Gary Franks from MI posted over 8 years ago:

Here is a worksheet from the IRS for an IRA account. I have not found the penalty's if you fail to take the RMD's. https://www.irs.gov/retirement-plans/plan-participant-employee/required-minimum-distribution-worksheets


Gary Franks from MI posted over 8 years ago:

According to the IRS worksheet, the first, take the balance of your IRA on Dec of the year you turn 70 1/2 divided by 27.4 (IRS Chart).


Doug from NY posted over 8 years ago:

Gary, the penalty is mentioned in the authoritative IRA distribution publication 590-B (see "excess accumulation"), which refers to Form 5329 for computing the penalty.


Dennis Berthold from TX posted over 8 years ago:

From studies I've read (wish I could remember them all!) the IRS formula for RMDs is the best for preserving principal. And it's simple. I keep a portion of my IRA in a GNMA account and take my RMD in a lump sum from that in November. That cuts down on the risk of withdrawing late in the event of a downturn in stocks. When the time seems right, I replenish the GNMA with enough money to fund the following year's RMD, which you can compute on January 1 of every year.


Frank Drake from FLORIDA posted over 8 years ago:

I agree with Michael M. from FL about taking the RMD early and investing it but the amount you take out is the same if you take it early or late since it is based on the amount in your account as of Dec. 31 of the year before.


Mister D from CA posted over 8 years ago:

Dear Gurus, I just gotta say that L Toll from CT is on the right track but please let me add what seems to me as a "no brainer". To me there is only ONE central issue for this entire thread ... simply How Best to Optimize your "After-Tax" Returns. Other issues such as timing your RMD for your own annual expenses is an important matter but is unrelated to the central investment goal of maximizing after-tax returns. Please correct me if the following strategy is flawed but I prefer to take the RMD at the beginning of the year for one central reason. The sooner you can extract your funds from the burdensome highly taxed IRA which is taxed as "Ordinary Income", the better off you will be. The reason is that you can readily reinvest those same funds you got from your RMD into a tax-efficient holding in your taxable acct which is not subject to the Ordinary Tax Rate. Instead, your reinvested funds will stay invested (and hopefully grow) and ultimately, someday will be subject to various lower and thus more beneficial tax rates such as Qualified Dividends, Long term Cap Gains, etc. Granted, if you do the math, the benefit I highlight is only derived from the anticipated “gain” you experience from January thru December which is ultimately taxed at a much lower tax rate than if that gain had remained in the IRA until December … but we all know that little things add up over time. I’d love to have even an extra half of a percent!


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