If you have tax-deferred retirement accounts, you’ll need to take required minimum distributions (RMD) eventually. What yours will look like is determined by a number of factors, including your age and account balance. 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 required minimum distributions either annually, quarterly or monthly, with this decision revolving around what your financial plans look like. As long as you withdraw the minimum required amount by December 31, the tax implications are unchanged.
A financial advisor can help you create a financial plan for your retirement. Speak to an advisor today.
Understanding How RMDs Work
An RMD is the amount of money you must withdraw each year from certain tax-advantaged retirement accounts starting at age 73 (or 75 for people born in 1960 or later). You can take out more than your RMD, but you must withdraw at least this much each year. The amount of your required minimum distribution is determined by your age and savings. Most taxpayers can calculate this amount each year using the IRS Uniform Lifetime Table.
Those who turned 72 in 2022 had until April 1, 2023 to take their first required minimum distributions (RMDs). However, in 2023, this age requirement was pushed back to age 73. The SECURE Act initially increased the age requirement for RMDs from 70.5 to 72 in 2019, and SECURE Act 2.0 increased it again from 72 to 73 (75 for people born in 1960 or later).
The purpose of an RMD is so that the IRS can eventually collect the taxes that it deferred when you made contributions to your various retirement accounts. It applies to accounts such as 401(k)s, IRAs and almost any other form of retirement account on which you don’t pay taxes. The only significant exceptions are Roth IRAs and other similarly situated accounts.
You must calculate a required minimum distribution for each retirement account in your name. So if you have three different qualifying retirement accounts, you’ll have to calculate the required minimum distribution for all three accounts. If you fail to withdraw (and pay taxes) on a required minimum distribution, you can be taxed at up to 25% of the required amount. For example, if you were required to withdraw at least $10,000 and didn’t, you can face a tax bill of up to $2,500. This penalty drops to 10% if the RMD is corrected within two years.
You can use an RMD however you see fit within the rules. The government just wants to make sure you eventually pay taxes on this money. The only restriction is that you cannot reinvest it in a tax-advantaged retirement account.
Annual RMD Withdrawals
An annual withdrawal plan means that you calculate and withdraw your required minimum distribution in one lump sum each year. This is a perfectly acceptable approach for accounting purposes since your required minimum distribution is set by a predetermined formula. You’ll calculate it based on the value of your retirement accounts as of December 31 the year before and using either the Uniform Lifetime Table or Table II (Joint Life and Last Survivor Expectancy) that the IRS releases for each year’s tax filings.
So, for example, to calculate your RMD for 2025, you would have used the value of your retirement accounts as of December 31, 2024, and the IRS table that applies to you.
Most taxpayers who choose to make annual withdrawals do so either at the beginning or at the end of each tax year. This is a matter of personal accounting since you can withdraw this money at any time. The one exception is that in the first year that you qualify for a required minimum distribution, you must begin making these 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 minimum distributions, there are pros and cons to the annual approach. The benefits to annual withdrawals can include:
- Immediate resolution of your tax obligations: By withdrawing all of your required minimum distribution at once, at the start of the year, you get your tax obligation over with. This assumes you have taxes withheld from your distribution, and of the right amount.
- Reinvestment opportunities: If you have other strong investments, you can take your minimum distribution and invest it in those opportunities earlier, with more time for growth.
- Potentially better 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 it all at the end of the year can mean more growth in your retirement account over the long run. This is the biggest advantage of making annual withdrawals.
However, there are some downsides to annual withdrawals, too. Those can include:
- Potentially higher estimated taxes: Do you pay taxes quarterly? For example, maybe you own a business or generate self-employment income. You can significantly increase your estimated taxes by taking an early minimum distribution.
- Cash flow disruption: Some people need the structure of a regular income for their financial planning purposes. In this case, a lump sum withdrawal isn’t ideal.
- Potentially forgetting: If you wait until the end of the year to make your minimum distribution, there’s a chance you’ll forget to do so altogether.
- Risk of spending the tax money: When you withdraw money from your retirement account, you must pay taxes on the profits that the account has accrued, as well as on the principal, too. If you take your RMD early in the year, there’s a risk that you will spend the portion of that money that you will later need to pay taxes. (This ultimately depends on how you structure your account, as some retirement accounts will automatically withhold taxes on your behalf.)
Should You Try Monthly or Quarterly RMD Withdrawals?
The other common approach to required minimum distributions is for retirees to take this money either every month or every quarter. As with annual distributions, there’s no best way to handle this money. It all comes down to a matter of preference. Some retirees prefer taking a lump sum distribution each year. Others prefer a series of smaller monthly withdrawals.
This isn’t the only option, either. You can make distributions as frequently as your portfolio will allow transfers. However, monthly is the most common approach.
The benefits of a monthly or quarterly approach can include:
- Cash flow management: Making monthly withdrawals allows you to treat this as a regular income. Many retirees prefer this style of cash flow over a lump sum format, as it helps with personal finance and budgeting. This is often the biggest advantage to making monthly or quarterly withdrawals.
- Estimated taxes: As with annual withdrawals, if you pay quarterly taxes based on other income, having your required minimum distribution arrive in regular segments can make these estimated taxes easier.
- Tax payments: If you make monthly withdrawals, it’s often easier to have your portfolio manager automatically deduct any applicable income taxes so that you don’t have to worry about setting the money aside.
Some potential downsides to a monthly or quarterly approach can include:
- Reduced growth: The longer you leave your money in place, the more it can grow. If you take your withdrawals over the course of the year, your portfolio will lose some opportunities for growth based on reduced capital.
- Potential for miscalculation: This is less of a concern if you work with a professional. But if you withdraw your money in stages (rather than one lump sum), there’s a chance that you’ll miscalculate or otherwise make a mistake in your minimum withdrawal.
Ultimately, this comes down to the choice that’s best for your finances. Your money has the most potential for growth if you take your entire minimum distribution at the end of each calendar year. But personal budgeting may be easiest if you take your minimum distribution in 12 monthly portions.
If you do take your minimum distribution at the end of the calendar year, consider an automatic withdrawal. Even professional brokers can get distracted around Christmas and New Year’s. You don’t want to discover that your sell order got held up by the holidays.
Bottom Line
You can take your required minimum distribution at any point, so long as it happens before the end of the year. Some retirees take their money in one lump sum at the end of the year to give it the most time to grow tax-free. Others withdraw their money each month, to give themselves a regular stream of income.
Tips for Retirement Planning
- Will you have enough money to support yourself through retirement? While no one has a crystal ball, a financial advisor can help you assess your income needs in retirement and build a plan to meet them. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area. And you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Getting the RMD right is extremely important. The tax implications for this are huge, with potential liability up to 25% of the entire amount. So make sure you know how to calculate your required minimum distribution.
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