Important disclaimer: Income Securities Investor does not provide tax or legal advice. This article is for general information only. Your situation may differ; consult your tax advisor before making decisions about Required Minimum Distributions (RMDs).
Is It Better to Take RMD Monthly or Annually?
Once you reach your RMD starting age, 73 for most people today (rising to 75 for those born in 1960 or later), you’re required to take annual withdrawals from most tax-deferred retirement accounts. The first year you must take an RMD is the calendar year after you reach the RMD age, and you may delay that first RMD until April 1 of the following year. If you delay, you’ll still owe the RMD for the new year by December 31, meaning two RMDs in one calendar year, which can increase that year’s taxable income and potentially your tax bracket. Talk with your tax advisor before choosing to defer.
The amount you must withdraw is determined by IRS life-expectancy tables, but you control the payout schedule, monthly, quarterly, semiannually, or all at once. That choice mainly affects cash flow management, operational simplicity, market-timing exposure, and how you handle withholding/estimated taxes, not the fact that RMDs are generally taxed as ordinary income.
Let’s discuss the pros and cons of both so you can make an informed decision
Annual RMDs: The Pros
Many retirees take their entire RMD as a single distribution late in the year, often in the 4th quarter. This has some advantages:
More Time for Investment Growth
Keeping your dollars in the account longer gives your investments more chance for tax-deferred growth. When you have large IRA or 401(k) balances, this can be considerable extra income, especially in good market years.
Withholding and Tax Timing Considerations
Taking an RMD later in the year doesn’t change that it’s ordinary income. What it does affect is how and when you handle withholding and estimated taxes. Some retirees prefer to settle most of their tax bill through year-end withholding instead of making quarterly payments. Delaying also lets you see your year’s income picture before deciding on additional planning moves such as Roth conversions or qualified charitable distributions.
Administrative Simplicity
Taking one withdrawal instead of twelve simplifies recordkeeping. You only get one 1099-R at tax time, and you minimize the number of transactions to track or reconcile.
But annual RMDs aren’t risk-free.
Cons of Annual RMDs
Market Timing Risk
If your securities decline in value at the end of the year, just before the withdrawal, you may be compelled to sell at a loss to meet the RMD deadline.
End-of-Year Backlog
Financial institutions get busy in December. Waiting until the very last minute can translate into missing the deadline for RMD and the associated penalties.
No Earned Income
If you rely on your retirement accounts for living expenses, one large distribution can make budgeting difficult.
Monthly RMDs: A Paycheck-Like Approach
The other option is to spread your RMD over 12 equal monthly payments.
Monthly Income
Monthly payments are like the traditional paycheck, and they provide a steady stream of income for the retiree who must tap their retirement accounts for everyday living expenses.
Reduced Market Timing Risk
Taking out small amounts over the course of the year can help you avoid selling a large number when the market falls. That minimizes volatility and hedges the sequence of returns risk.
Automatic Tax Withholding
Establishing monthly RMDs typically enables you to automate withholding of taxes, and it can be useful for quarterly estimated tax payments or preventing underpayment penalties.
Cons of Monthly RMDs
Lower Growth
Taking cash out early in the year reduces the compound growth possibility. Each dollar cashed out in January is one that doesn’t get invested in the other 11 months.
Additional Administrative Burden
Although most custodians can automatically deduct monthly payments, reconciling and tracking numerous payments over numerous accounts can become onerous.
Decreased Flexibility for Taxes
Periodic payments limit your ability to make strategic decisions about the timing of your income, especially for purposes of minimizing or maximizing tax deductions.
Is it Better to Take RMD Monthly or Annually?
Ultimately, it’s up to you. Here are a few questions to help you decide:
- Do you need your RMD to pay monthly bills? If so, monthly might be the way to go.
- Do you want more control over your tax situation? If so, annual might be better.
- Are you concerned about market volatility? Monthly can help you average out the ups and downs.
- Is simplicity your priority? Annual withdrawals reduce the paperwork and decision fatigue of more frequent transactions. There’s no one-size-fits-all answer. In fact, you can change your approach from year to year as needed.
Consider a Hybrid Approach
Other investors have monthly redemptions for day-to-day living and make a lump sum for the second half of the year for the purposes of completing the RMD. That facilitates balancing cash flow needs, tax, and portfolio optimization planning.
Some make monthly automatic distributions but remind themselves once a year in the autumn to review their tax situation and make their last year-end adjustments.
The good news? The IRS doesn’t require consistency. You can change your distribution schedule yearly as long as the total amount needed is taken by the deadline.
IRS Penalties for Missed RMDs
Whether you choose monthly or annual distributions, missing the deadline has consequences. Failure to take the full RMD can result in an excise tax of up to 25% on the undistributed amount. If corrected within two years, that penalty may be reduced to 10%. But in either case, it’s better to avoid the problem altogether.
Waiting until the last week of December to process an annual RMD, especially in volatile markets or during the holidays, isn’t recommended. Many custodians require several days to execute withdrawals and process paperwork.
Put RMDs in the Bigger Picture
Whether you take RMDs monthly, annually, or use a hybrid approach, the key is to see them as part of your overall retirement strategy, not just a box to check each year. The schedule you choose should fit with your cash-flow needs, market outlook, and tax planning.
At Income Securities Investor, we encourage readers to fold RMDs into a broader plan that balances income stability, investment goals, and tax efficiency. A trusted advisor can help you align timing decisions with your full financial picture.
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