What Is the Best Month to Take Your RMD?

Required Minimum Distributions (RMDs) are mandatory withdrawals from certain retirement accounts. While there isn’t a single “best” month for everyone to take their RMD, understanding the factors that influence this decision can help you determine the optimal timing for your financial situation. This article will explore the rules surrounding RMDs and the strategic considerations for their timing.

Understanding Your RMD and Deadlines

A Required Minimum Distribution is the minimum amount you must withdraw from your tax-deferred retirement accounts each year. These distributions become mandatory once you reach age 73 for those who turned 72 after December 31, 2022. RMDs ensure taxes are eventually paid on tax-deferred retirement savings. Common retirement accounts subject to RMDs include traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k)s, 403(b)s, and 457(b)s. Roth IRAs are generally exempt from RMDs during the original owner’s lifetime. You calculate your RMD amount each year, typically based on your account balance at the end of the previous year and your life expectancy by IRS tables.

The annual deadline for taking your RMD is December 31st. For your first RMD, the deadline is April 1st of the year following the year you reach age 73. If you choose to delay your first RMD until this April 1st deadline, you will need to take your second RMD by December 31st of that same year, potentially resulting in two taxable distributions in one calendar year.

Key Factors for Timing Your RMD

Several considerations influence when you take your RMD throughout the year, as the “best” month is individualized. Tax planning is a significant factor, as RMDs are taxed as ordinary income. Spreading out withdrawals over several months or taking the distribution at a specific time can help manage your overall taxable income for the year, especially when considering other income sources like Social Security or pensions. Market fluctuations also play a role in strategic timing. If the market experiences a downturn early in the year, you might consider delaying your RMD until later, hoping for a market recovery before withdrawing funds. Conversely, if the market is performing well, taking your RMD earlier could lock in a higher distribution amount from a larger account balance.

Your cash flow needs throughout the year can also dictate the most convenient time to take your RMD. For instance, if you anticipate a large expense, aligning your RMD withdrawal with that need could be beneficial. Regardless of your timing strategy, it is important to meet the December 31st deadline for your RMD (or April 1st for your first RMD). Failure to do so can result in a 25% penalty of the amount not withdrawn. This penalty can be reduced to 10% if the shortfall is corrected within two years.

Taking Your RMD

Once you have determined the optimal timing for your RMD, the process of withdrawing the funds typically begins by contacting the financial institution holding your retirement account. Your custodian, such as a brokerage firm or bank, can confirm your exact RMD amount for the year. They often provide this information automatically at the beginning of each year.

You will then need to choose your preferred distribution method. Common options include direct deposit into a checking or savings account, receiving a check, or transferring the funds to a taxable brokerage account. When taking your RMD, you have the option to have federal and, if applicable, state income taxes withheld from the distribution. The default federal income tax withholding rate is often 10%, but you can typically elect to have more or less withheld to manage your tax liability. Proper record keeping is important for tax purposes. Your financial institution will report your RMD to you and the IRS on Form 1099-R, “Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.” This form details the gross distribution amount and any taxes withheld. It is advisable to retain these statements and confirm that your distribution was completed by the annual deadline to avoid any penalties.