With the calendar well into 2026, individuals turning 73 or older this year are prompted to assess their required minimum distributions (RMDs) from retirement accounts. These mandatory withdrawals, stipulated by the IRS, must be undertaken within specific timelines, and for some retirees, the decision on when to take an RMD within the year may bear meaningful consequences for their financial standing.
This discussion aims to clarify the considerations involved in determining whether to initiate RMDs early or later in the year, while reinforcing the nature of RMD obligations and the choices available to retirees.
Understanding Required Minimum Distributions
Required minimum distributions are obligatory annual withdrawals taken from non-Roth retirement accounts, enforced by the IRS starting in the year an individual reaches age 73. Notably, Roth IRAs are exempt from RMDs given their tax-exempt withdrawal status. The exact RMD amount is derived from the retiree’s age and the value of their taxable retirement accounts as calculated at the close of the prior year.
Specifically, the percentage of withdrawal escalates with age; for example, an individual turning 73 is required to withdraw just under 3.8% of their account’s previous year's ending balance. This rate increases progressively, reaching 6.25% at age 85 and approximately 11.24% by age 95. These percentages are determined by IRS worksheets designed to assist in accurate calculation, though custodians or brokerage firms typically provide retirees with the necessary account valuation data.
It is important to emphasize that the RMD figure represents a minimum; retirees may choose to withdraw amounts exceeding this requirement if they so desire.
Options and Requirements in Distributing Funds
Retirees managing multiple retirement accounts benefit from certain flexibilities. Specifically, someone with more than one IRA can aggregate their account values for RMD calculation purposes and fulfill their distribution from a single account. This consolidation option also applies among multiple 403(b) plans, although retirement accounts and 403(b) funds must be treated distinctly without co-mingling for RMD purposes. Conversely, each 401(k) held from a previous employer must be treated independently, requiring separate withdrawals conforming to their own stipulated minimums.
The distribution deadline is generally December 31 of the tax year, except during the initial year a retiree turns 73. In that case, the deadline extends to April 1 of the following year. This allowance can result in two taxable withdrawals within a single tax year, a factor which may influence tax bracket positioning.
Choosing When to Take Your RMD: Early or Late?
Deciding whether to execute RMDs at the beginning or end of the year hinges on multiple, individualized considerations, precluding a universal answer.
A straightforward rationale emerges when the distribution is required to meet living expenses. Retirees reliant on RMDs for income should prioritize their cash flow needs, opting to take distributions earlier if postponing would create financial hardship. The timing does not affect the total tax liability owed for that RMD amount since taxes are assessed based on the withdrawal amount taken during the tax year.
The complexity deepens when liquidating investments is necessary to generate cash for the distribution. The market’s fluctuations between the beginning and end of the year imply that selling assets during a market upswing preserves more invested capital and reduces the proportional depletion of the portfolio. Since RMD amounts are fixed based on the prior year’s account valuation, selling assets at a higher price to cover the distribution requires offloading fewer holdings, enabling more growth potential to remain intact within the retirement accounts.
However, market timing is inherently uncertain—future asset values might increase beyond the sale price, posing a risk to delaying sales. Retirees need to weigh this risk realistically, considering their tolerance and financial goals.
A further consideration is that RMDs need not be withdrawn in a single transaction. Withdrawals can be staggered throughout the year to hedge against timing risk, provided the total annual distribution meets or exceeds the minimum requirement.
Additionally, RMDs may be taken as "in-kind" distributions, involving the transfer of assets instead of cash. This option allows retirees to retain specific investments within their tax-advantaged accounts while fulfilling their withdrawal obligation by transferring ownership of those assets. The IRS taxes such distributions based on their fair market value at the time of transfer. Choosing in-kind distributions may suit retirees who intend to reinvest or otherwise utilize the assets without liquidating them outright.
Conclusion: A Nuanced Decision Centered on Portfolio and Tax Considerations
Ultimately, the primary factor influencing the timing of RMDs lies not simply in choosing between early or late withdrawal dates but in mitigating the potential adverse impacts on portfolio performance and tax efficiency. Selling assets during unfavourable market conditions to fund RMDs could erode long-term retirement savings. Conversely, addressing liquidity needs promptly can prevent financial stress and maintain consistent retirement income.
Retirees should carefully evaluate their financial circumstances, market conditions, and tax implications when planning RMD timing, aiming to optimize the balance between meeting required obligations and preserving the health of their retirement portfolios.