When Should You Take RMDs?

This article is for informational purposes only and is not financial advice.

As you inch closer to retirement, a pivotal decision awaits those delving into their tax-deferred accounts. Should you take your required minimum distributions (RMDs) monthly or annually?

The frequency of these withdrawals isn’t just a logistical choice – it plays a role in tax implications and the holistic management of your retirement funds.

By now you might be wondering: How do distributions work? Read on to unravel the critical considerations tied to RMDs like the applicable age, recent legal changes and the tax consequences tied to the timing of these distributions. It just might shape the way you navigate your finances in retirement.

What Are RMDs?

The IRS defines RMDs as “the minimum amounts you must withdraw from your retirement accounts each year.”

Calculating RMDs involves dividing your account balance by the IRS estimate of your life expectancy. Failure to withdraw incurs a hefty 50% penalty on the amount due. Your first RMD is generally required by April 1, the year after you reach the starting age, with subsequent RMDs due by Dec. 31 each year.

The RMD rule applies to these types of plans:

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

What Is the Age for RMDs?

You must withdraw annually from tax-deferred retirement accounts once you hit the starting age for RMD of 72, or 73, if you turned 72 after Dec. 31, 2022, according to the IRS.

Notably, the SECURE 2.0 Act pushed the age for initiating RMDs from 72 to 73. According to this new required minimum distribution law, if you turned 72 in 2023, your initial RMD must be taken by April 1, 2025, applicable for the 2024 year. If you reached 73 in 2023, you were 72 in 2022 and subject to the age 72 RMD rule for that year.

For those inheriting IRA accounts, if the participant passed away after 2019, the entire balance must be distributed within 10 years. There are exceptions for a surviving spouse, a minor child, a disabled or chronically ill individual, or someone not more than 10 years younger than the employee or IRA owner.

Are RMDs Taxable?

Yes, RMDs from a tax-deferred retirement account, like a traditional IRA, typically count as ordinary income in the year you receive them.

The IRS dictates:

“The account owner is taxed at their income tax rate on the amount of the withdrawn RMD. However, to the extent the RMD is a return of basis or is a qualified distribution from a Roth IRA, it is tax free.”

However, if you contributed after-tax funds to the retirement account, a segment of the RMD might be non-taxable. To fully understand the tax implications of your RMD, consult your tax professional.

How Do Distributions Work and When Do You Take Them?

Retirees have the flexibility to receive their RMDs annually, quarterly or monthly. You’re not limited in the number of withdrawals you make throughout the year, as long as the minimum annual requirement is met. However, it’s important to note that any extra withdrawals beyond the minimum don’t carry over to cover future RMDs.

The decision on how frequently to receive RMDs is based on:

• Financial goals
• Budgeting preferences
• Tax planning

This flexibility allows retirees to tailor their distribution strategy to align with their unique financial goals and circumstances.

Taking RMDs Annually: Pros and Cons

Deciding between monthly and annual RMDs is a choice that demands consideration of personal financial goals, tax consequences and prevailing market conditions.

Taking an annual distribution, or one lump sum each year has several benefits, including:

• Immediate resolution of tax obligations.
• More reinvestment opportunities throughout the year.
• Maximizing period of tax-free growth for the remaining retirement account.

However, there are also several drawbacks, including:

• Potentially higher estimated taxes if paying quarterly.
• Potential cash flow disruption if retiree doesn’t effectively budget for expenses.
• Risk of missing the deadline to take the RMD.

Taking RMDs Monthly: Pros and Cons

Taking a series of smaller monthly withdrawals tends to be attractive for several reasons, including:

• Providing a steady and reliable source of income.
• Easily managing tax payments.

However, taking monthly withdrawals is not without trade-offs, including:

• Reduced growth opportunities within the remaining portfolio.
• Potential for miscalculation, especially if done without the help of a professional.

The Bottom Line

As you approach the age for RMDs, staying well-informed becomes paramount for wise decision-making. Whether leaning toward a consistent monthly income or a versatile annual approach, the most important thing is determining a distribution strategy that works with your individual preferences and financial objectives. Taking the time to plan should help ensure a comfortable and secure retirement.

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