Is It Better to Take RMD Monthly or Annually?

A Required Minimum Distribution (RMD) is a mandatory withdrawal from retirement accounts like traditional IRAs and 401(k)s. You must begin taking RMDs once you reach age 73, though this age is scheduled to increase to 75. The IRS mandates these distributions to ensure taxes are paid on the funds, but Roth IRAs are not subject to RMDs for the original owner.

The deadline for taking RMDs is December 31st each year, with an exception for your first one. You can delay your first distribution until April 1st of the year after you turn 73. If you choose this option, you will have to take two distributions in that year, which could have significant tax implications. Two common approaches are taking the entire amount at once or breaking it into monthly payments.

Implications of an Annual Withdrawal

Taking an RMD as a single, lump-sum withdrawal is a straightforward approach that involves one transaction per year. This method allows your retirement funds to remain invested longer, potentially benefiting from continued tax-deferred growth if the market performs well. The simplicity of a single transaction also reduces administrative tasks and potential fees associated with multiple withdrawals.

This strategy is not without its risks, primarily related to market timing. A significant market downturn occurring just before your planned withdrawal date could force you to sell more shares at a lower price to meet the required distribution amount. For example, if your RMD is $24,000 and your fund shares are worth $50, you would need to sell 480 shares; if the market drops and shares are worth $40, you would need to sell 600 shares to meet the same requirement.

Managing a large, one-time cash infusion also requires careful budgeting. The withdrawn funds do not have to be spent and can be reinvested in a taxable brokerage account, allowing it to continue growing, though future gains will be subject to taxes. For those who do not reinvest, the lump sum must be managed to cover expenses for the entire year. This approach is often favored by individuals who have other stable sources of income and do not rely on the RMD for daily living expenses.

Implications of Monthly Withdrawals

Opting for monthly RMD withdrawals transforms the distribution into a predictable income stream, similar to a paycheck, which can simplify budgeting for regular expenses. This steady cash flow can help in planning for recurring bills and discretionary spending. Many retirees find this consistency comforting and easier to manage, as it aligns with the familiar pattern of receiving regular income.

This method of systematic withdrawals can also mitigate the effects of market volatility. By withdrawing smaller amounts at different points throughout the year, you are engaging in a practice called “reverse dollar-cost averaging.” You will sell shares at various price points—some high, some low—which can smooth out the average price per share over the year. This diversification of withdrawal timing reduces the risk of being forced to sell a large number of shares during a sudden market dip.

While monthly withdrawals offer stability, they may result in slightly less tax-deferred growth. Because you are incrementally reducing your account balance each month, there is less capital remaining to benefit from potential market gains. Additionally, some financial institutions may charge transaction fees for each withdrawal, although many custodians offer automated withdrawal plans without such fees.

Key Factors in Making Your Decision

Personal Cash Flow and Budgeting

Your personal budgeting style and income needs are a significant factor in choosing a withdrawal strategy. If you rely on your RMD to cover monthly living expenses, a regular, predictable payment can make financial management much simpler. Conversely, if you have other significant income sources and do not need the RMD for immediate expenses, an annual withdrawal may be more appealing for funding a large purchase or a strategic reinvestment.

Market Outlook and Risk Tolerance

Your perspective on market behavior and your comfort with investment risk should influence your decision. Taking an annual RMD late in the year is an implicit bet that the market will trend upward, maximizing the value of your account before the withdrawal. A monthly withdrawal strategy is more conservative and is often preferred by those with a lower risk tolerance, as it hedges against the risk of a single, poorly timed withdrawal in a volatile market.

Tax Planning and Withholding

The timing of your RMD can have notable tax implications. A large, single withdrawal requires careful calculation to ensure the correct amount of federal and state tax is withheld, as under-withholding could lead to a surprise tax bill and potential penalties. A substantial annual RMD could also push you into a higher tax bracket and increase your modified adjusted gross income (MAGI). This can trigger an Income-Related Monthly Adjustment Amount (IRMAA), resulting in higher premiums for Medicare Part B and Part D. Monthly withdrawals can make tax management more seamless by spreading the liability across the year.

Simplicity and Personal Preference

Personal preference plays a large part in this decision. For some, the “set it and forget it” nature of an annual withdrawal is appealing, as it is a single task to manage each year. Others may feel a greater sense of control with monthly withdrawals. Setting up an automated monthly transfer can make the process just as simple as a one-time withdrawal, but with the added benefit of regular cash flow.