Is It Better to Take RMDs Monthly or Annually?

If you have tax-deferred retirement accounts, you’ll need to take required minimum distributions (RMDs) eventually. This amount is determined by a number of factors, including your age, account balance and the relative age of your spouse.

The IRS requires you to report this distribution on your annual taxes, so it has to happen by the end of each calendar year. Most retirees collect their RMDs either annually, quarterly or monthly. So long as you withdraw the minimum required amount by Dec. 31, the tax implications are unchanged.

So, should you take RMDs monthly or annually? The answer is different for everyone.

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What Are RMDs?

RMDs are amounts you’re obligated to withdraw from certain tax-advantaged retirement plans, including:

• Traditional IRAs
• SEP IRAs
• SIMPLE IRAs
• 401(k) plans
• 403(b) plans
• 457(b) plans
• Profit-sharing plans
• Other defined contribution plans

According to the IRS:

“Required minimum distributions (RMDs) are the minimum amounts you must withdraw from your retirement accounts each year. You generally must start taking withdrawals from your traditional IRA, SEP IRA, SIMPLE IRA, and retirement plan accounts when you reach age 72 (73 if you reach age 72 after Dec. 31, 2022).

Account owners in a workplace retirement plan (for example, 401(k) or profit-sharing plan) can delay taking their RMDs until the year they retire, unless they’re a 5% owner of the business sponsoring the plan.”

Your RMD amount is determined by your age and savings, and taxpayers can calculate it each year using the IRS’ Uniform Lifetime Table.

Roth IRAs don’t have RMDs, so you can leave money in those accounts as long as you live. While Roth IRAs do not have RMDs for the original account holder, beneficiaries who inherit a Roth account may be subject to RMDs.

Should You Take RMDs Monthly or Annually?

Determining when to take RMDs is a uniquely personal decision.

Here’s an overview of both strategies. If you still have questions about when to take RMDs, click here to get matched with a vetted financial advisor who may be able to help.

Annual Withdrawals: What to Know

An annual withdrawal plan means you calculate and withdraw your RMD in one lump sum each year.

Your RMD is calculated based on the value of your retirement accounts as of December 31 the year before and using the Uniform Lifetime Table that the IRS releases for each year’s tax filings.

Many taxpayers who choose to make annual withdrawals do so either at the beginning or end of each tax year and is a personal preference since you can withdraw this money at any time during the calendar year.

However, in the first year you qualify for a RMD, you must begin making withdrawals by April 1. For all years afterward, the IRS has no deadline other than the end of the year.

Whenever you choose to withdraw your RMD, there are pros and cons to the annual approach.

Annual RMD Withdrawals: Pros

Immediate resolution of your RMD tax obligations: By withdrawing annual RMDs all at once, you potentially complete your tax obligation. This assumes you have taxes withheld from your distribution and of the right amount.

Reinvestment opportunities: If you have other strong investments (excluding tax-advantaged accounts), you could potentially invest your RMD in those opportunities earlier, with more time for potential growth.

Potentially more growth: Since this is a tax-advantaged account, the sooner you withdraw this money, the sooner you pay taxes on it. By contrast, the longer you leave it alone, the longer it can grow tax-deferred. Withdrawing at the end of the year could mean more potential growth in your retirement account before taking an RMD.

Annual RMD Withdrawals: Cons

Potentially higher estimated taxes: If you pay taxes quarterly, you can potentially increase your estimated taxes by taking an early minimum distribution.

Cash flow disruption: Some may need the structure of a regular income for their financial planning purposes, which a lump sum withdrawal can disrupt.

Potentially forgetting: If you wait until the end of the year to make your RMD, there’s a chance you’ll forget to do so altogether.

Risk of spending tax-allocated funds: When you withdraw from your retirement account, you must pay taxes on the account’s profits, as well as the principal. If you take your RMD early in the year, there’s a risk that you could potentially spend the portion of money you will later need to pay taxes. (Although you can set some retirement accounts to automatically withhold taxes on your behalf.)

Monthly/Quarterly Withdrawals: What to Know

The other common approach to RMDs is taking this money either every month or quarter. As with annual distributions, it’s probably a good idea to speak with a financial advisor to see which method could potentially make the most sense for your retirement plan. You can make distributions as frequently as your portfolio allows. However, monthly is the most common approach.

Monthly/Quarterly Withdrawals: Pros

Cash flow management: Making monthly withdrawals allows you to treat this as regular income. Many retirees may prefer this style of cash flow over a lump sum, as it helps with personal finance and budgeting.

Estimated taxes: If you pay quarterly taxes based on other income, having your RMD arrive in regular segments could help simplify estimated taxes.

Tax payments: If you make monthly withdrawals, it could be easier to have your portfolio manager automatically deduct any applicable income taxes so you don’t have to worry about setting the money aside.

Monthly/Quarterly Withdrawals: Cons

Reduced growth: The longer you leave your money in place, the more potential it has to grow. If you take your withdrawals over the course of the year, your portfolio could potentially lose some opportunities for growth based on reduced capital.

Potential for miscalculation: While less of a concern if you work with a financial advisor (click here to get matched with up to three for free), if you withdraw your money in stages (rather than one lump sum), there can be more opportunity for miscalculations.

Is It Better to Take RMDs Monthly or Annually?

Ultimately, this choice comes down to what’s best for your individual financial situation.

Your money could have the potential for additional growth if you take your entire RMD at the end of each calendar year. However, personal budgeting may be easiest if you take your RMD in 12 monthly portions.

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Sources:

1. “Journal of Retirement Study Winter” (2020). The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of your future results. Please follow the link to see the methodologies employed in the Journal of Retirement study.

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