Tax-deferred investment accounts such as traditional IRAs, 401(k) plans, and 403(b) plans are subject to required minimum distribution (RMD) rules. That means accountholders upon reaching a certain age -- 73 years old for anyone born in 1951 or later -- must withdraw some money annually or pay severe penalties.
Generally, RMDs must be completed before the end of the calendar year. The only exception is that someone taking his or her first RMD can delay until April 1 of the subsequent year. Those guidelines leave retirees with three options: Take the full RMD early in the year, break it into periodic installments, or delay it until the end of the year.
Which strategy is best?
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There is no "best time" to take your RMD
Generally speaking, there is no best time to take an RMD. There are pros and cons to each withdrawal strategy. The most suitable choice depends on personal circumstances and preferences. Here are a few things to consider:
- Take RMDs early in the year: The upside to taking RMDs early in the year is you no longer need to worry about making the withdrawal once it's complete. The downside is you will need to make at least one estimated tax payment. In addition, taking the withdrawal early in the year means you forfeit time during which your money could have grown in a tax-deferred environment. That could be costly if the stock market performs well in the months following your RMD.
- Take RMDs throughout the year: This strategy is a good middle ground. The upside to taking RMDs throughout the year is you get regular income and strike a good balance between taking RMDs early, which reduces the time your money spends in a tax-deferred account, and taking them late, which could force you to withdraw money during a stock market downturn. The downside is you will have to make quarterly estimated tax payments.
- Take RMDs late in the year: The upside to taking RMDs late in the year is maximizing the time your money spends in a tax-deferred account. In addition, it eliminates the need to make estimated tax payments. But the downside is you may have to withdraw money while the market is down. RMDs are based on the account balance at the end of the previous year. The amount does not change if the market declines in the next year. So if stocks fall sharply before your RMD, the withdrawal will be a larger percentage of your portfolio than had you taken the money sooner.
Retirees often choose the second RMD strategy -- periodic installments taken monthly or quarterly -- because it splits the difference between the two extremes. In most cases, that decision makes sense. But retirees with a substantial amount of money invested in stocks should think twice about their withdrawal strategy in 2025.
Retirees should consider taking their RMDs sooner rather than later in 2025
The S&P 500 (^GSPC -0.03%) is commonly regarded as the best benchmark for the entire U.S. stock market. The median forecast from 17 Wall Street analysts says the index will end the year at 6,100. That implies just 2% upside from its current level of 5,983.
That forecast makes a case for retirees taking RMDs sooner rather than later this year. Wall Street sees little upside in stocks in the remaining months of 2025, but the market is rife with downside risk because of changes in trade policy and elevated valuations.
To elaborate, the S&P 500 is trading near its record high despite President Trump's imposing sweeping tariffs earlier this year. While those tariffs have yet to affect the economy, most experts anticipate higher prices and slower growth in the future. The stock market could fall sharply at the first sign those economic conditions are materializing.
In addition, the S&P 500 currently trades at 21.6 times forward earnings. A fairly expensive valuation that exceeds the five-year average of 19.9 times forward earnings and the 10-year average of 18.4 times forward earnings. While the elevated valuation alone is unlikely to cause a stock market downturn, it could make any future downturn particularly severe.
Here's the bottom line: It often makes sense to spread RMDs throughout the year, but I think the current market environment warrants a different strategy. The downside risk in the stock market means it may be prudent for retirees to take withdrawals sooner rather than later. Of course, if possible, you should always talk to a financial advisor who knows your personal circumstances before making decisions.
