Tax-deferred investment accounts, such as traditional IRAs and 401(k) plans, allow workers to save pre-tax dollars (which reduces their taxable income) in the present. In exchange, workers pay income tax on those contributions and any earnings in the future. Withdrawals made too early, meaning before age 59 1/2, are generally subject to a 10% penalty.
However, you cannot keep money in tax-deferred accounts indefinitely. They are subject to required minimum distribution (RMD) rules because the federal government must eventually get paid. That means retirees must withdraw a portion of the balance each year after they reach a certain age or else pay an excise tax equivalent to 25% of the amount not withdrawn.
- Born before July 1, 1949: RMDs begin at age 70 1/2.
- Born between July 1, 1949, and Dec. 31, 1950: RMDs begin at age 72.
- Born between Jan. 1, 1951, and Dec. 31, 1958: RMDs begin at age 73.
RMDs must generally be completed by Dec. 31. The first RMD is the only exception; it can be pushed until April 1 of the following year. But retirees are free to take the mandatory withdrawal at any time within those parameters. Here are the pros and cons of different strategies.
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The pros and cons of different required minimum distribution (RMD) strategies
Investors with traditional IRAs, 401(k) plans, and other tax-deferred accounts have three options when taking required minimum distributions. They can withdraw the money as a lump sum early in the year, make regular withdrawals as periodic installments throughout the year, or withdraw the money as a lump sum at the end of the year.
None of those strategies is necessarily better than the others. The best time to take an RMD depends on personal circumstances and preferences. But retirees should understand the pros and cons associated with each of those three approaches.
1. Take your RMD as a lump sum early in the year
The upside to taking your RMD early in the year (i.e., January) is that you no longer have to worry about it. You can check off the box on your to-do list and forget about that particular obligation. That strategy is sensible for anyone struggling to make ends meet because it provides income as soon as possible.
The downside to taking your RMD early in the year is that you forfeit the time your money could have otherwise grown in a tax-deferred environment. Additionally, once the withdrawal is complete, you must make an estimated tax payment to the IRS for the quarter in which you took the RMD.
2. Take your RMD as periodic installments throughout the year
The upside to taking your RMD in periodic installments (monthly or quarterly) throughout the year is that you get consistent cash flow to help cover living expenses. That approach is sensible for retirees who already make quarterly estimated tax payments, as the RMDs can be timed to cover that expense.
The downside to taking your RMD in periodic installments is that you will have to make multiple estimated tax payments, one for each quarter in which money was withdrawn. Making the estimated tax payments can be onerous, and missing the deadlines -- April 15, June 15, Sept. 15, and Jan. 15 -- results in an interest charge that compounds daily until the balance is paid.
3. Take your RMD as a lump sum late in the year
The upside to taking your RMD late in the year (i.e., December) is that you avoid having to make quarterly estimated tax payments. Additionally, you maximize the time your money spends in a tax-deferred account. That strategy is sensible for anyone not struggling to cover living expenses.
The downside to taking your RMD late in the year is that you may worry about the obligation or forget to make the withdrawal. Also, if you delay your RMD until December and the stock market falls sharply during the month, you will have to sell investments at an inopportune time.
At this point, retirees should consider waiting until December
At this point, retirees who have not taken their 2025 RMD and do not need the income to cover living expenses should consider waiting until December. October and November have historically been two of the strongest months for the U.S. stock market due to the increase in consumer spending around the holidays, so the probability of a market correction is small.
Additionally, if you delay your RMD until December, you will have a fairly accurate estimate of your tax bill for the year. So, you can ask your brokerage to withhold enough money to cover taxes on your RMD and other income. That eliminates the need to make estimated payments because taxes withheld from retirement account distributions are ratable, which means they are considered to have been paid evenly throughout the year.
Kevin McCormally at Kiplinger writes, "If your RMD is large enough to cover your entire tax bill, you can keep your cash safely ensconced in the IRA most of the year, avoid withholding on other sources of retirement income, skip quarterly estimated payments, and still avoid the underpayment penalty."
