Is It Better to Take My RMD Later or Earlier in the Year? How Do I Decide?

People may think they have no choice when it comes to taking required minimum distributions (RMDs) from their retirement accounts. While you can’t skip them, you can choose when and how to take them. That may be at the beginning or end of the year or as a stream of monthly, quarterly or semiannual payments. Each approach has its own advantages and drawbacks, which are worth weighing to determine what makes sense for you. None of them, however, will change the amount of your RMD. This is the value of your retirement accounts at the end of the previous year and your age.

A financial advisor can help you calculate and plan for your RMDs.

How to Calculate Your RMDs

To calculate your RMD, use your account balance as of December 31 of the previous year. Then, look up your life expectancy factor from the IRS Uniform Lifetime Table. ¹ To calculate your RMD, divide your account balance by the factor that corresponds to your age.

Plan your retirement withdrawals more effectively using our RMD calculator.

For example, if you’re 73 and your IRA balance was $500,000 on December 31, your divisor would be 26.5. Dividing $500,000 by 26.5 gives you an RMD of about $18,870 for the year. Each subsequent year, your divisor gets smaller, which gradually increases the percentage of your account balance you must withdraw.

If you have multiple IRAs, you can withdraw your total RMD from one account or spread it across several. RMDs from 401(k)s, however, must be taken separately from each plan. ²

Ways to Schedule Your RMDs

When it comes to scheduling your RMDs, you have a number of options.

Early in the Year Lump Sum

Some take the distribution as a lump sum, either at the start of the year or at the very end.

This approach works well for people who need the cash flow during the year. It helps avoid borrowing money or putting expenses on credit cards with interest. Others use this approach to reinvest the cash right away.

Taking a lump sum guarantees you won’t forget to take your RMD. This unfortunately means your money will stop generating gains in your retirement account. However, you can still deposit some or all of the cash into an interest-bearing bank account.

Monthly, Quarterly or Semi-Annually

Others opt to receive a steady cash flow throughout the year, taking RMDs on a monthly, quarterly or semiannual basis.

This approach lets you maintain steady income throughout the year. This can be especially helpful if you’re using the money to cover living expenses. It also keeps some of your RMD funds invested for part or most of the year. This allows it to continue generating gains.

With a quarterly distribution schedule, you can time the distributions to help cover your quarterly estimated tax payments on other income, in addition to the RMD itself.

Late in the Year Lump Sum

If you don’t need cash for expenses earlier in the year, leaving your RMD until year-end maximizes potential investment returns. This also means you can withdraw a lump sum large enough to cover the year’s entire income tax bill.

Tax Considerations

The schedule you use for RMDs does not change the tax you owe.

However, it can affect cash flow and the timing of tax payments. Making quarterly estimated payments requires paying those taxes earlier rather than holding the funds until filing time.

One rule allows RMD withholding to satisfy estimated tax requirements, even if the withholding occurs late in the year. To avoid a penalty for underpaying your estimated federal taxes, you must pay either 90% of that year’s tax or 100% of the previous year’s tax bill through withholding or estimated tax payments made throughout the year.

However, taxes withheld from retirement account distributions are treated as ratable. This means you pay them evenly throughout the year, regardless of when withholding actually occurs.

With this, you can take your RMD late in the year. This is when you will be able to make the most accurate estimate of your tax bill. You then have that amount withheld from your RMD to cover your taxes for your RMDs and other income. This eliminates the hassle of making estimated payments, as well as the risk of overpaying your estimated taxes.

What Happens If You Miss or Underpay Your RMD

Every RMD comes with a hard deadline: April 1 for your first year and December 31 for most years thereafter.

When you miss an RMD, it isn’t a minor slip. The IRS treats a shortfall as an excise tax matter and charges 25% of your original withdrawal amount. However, if you correct the mistake within two years, this rate drops to 10%.

This tax only applies to the gap, not the entire distribution. Say your RMD was set at $20,000, but you only pull $12,000. The $8,000 difference is the amount that you pay tax on, not the full $20,000.

Because the IRS charges this penalty on an account-by-account, year-by-year basis, one tax mistake can snowball quickly.

The IRS does allow relief in genuine cases. For example, you can file Form 5329 with an explanation and proof that you paid the required withdrawal. The IRS then decides to reduce or waive the penalty. ³ However, approval isn’t guaranteed, so it’s worth consulting a tax professional if this happens to you.

Given the stakes, many people hedge by front-loading part of their RMD earlier in the year. They then settle the remainder closer to the deadline. This way, a single missed cutoff doesn’t turn into a costly mistake.

Bottom Line

How you take your RMDs during the year can help manage your cash flow. It can also maximize the potential investment gain of your RMD money before withdrawal. Whether it’s best to take your RMD all at once or in installments largely depends on how you plan to use the money. There are pros and cons to each, so weigh both carefully to determine which solution best suits your retirement situation.

This choice also carries compliance considerations beyond cash flow and investment timing.

“Be proactive about calculating and taking RMDs. If you don’t take enough out of your IRA or 401(k), you could be hit with an excise tax of up to 25% if the money is not taken out within two years. RMDs generally start April 1 the year after you turn 73,” said Tanza Loudenback, CFP®.

Tanza Loudenback, Certified Financial Planner™ (CFP®), provided the quote used in this article. Please note that Tanza is not a participant in SmartAsset AMP, is not an employee of SmartAsset and has been compensated. The opinion voiced in the quote is for general information only and is not intended to provide specific advice or recommendations.

Tips for Planning Your RMDs

• A financial advisor can help integrate your RMDs into an income plan based on your assets and spending needs. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area. You can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, begin now.
• Be sure to coordinate withdrawals across accounts. If you hold multiple traditional IRAs, you can take your total RMD from just one. However, you must take 401(k) RMDs separately from each plan. Understanding these distinctions helps avoid penalties.

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