Whether you are new to The IVA family or a longtime member, you know that spending time in the market is one of my key tenets.
I regularly encourage younger investors to save and invest early and often. Heck, I even recommend that you contribute to your retirement accounts as early in the year as possible.
In response to my Upping the Limit: 2024 article, several IVA readers asked me if the same principle applies to the other side of the retirement coin—withdrawals:
You give good advice to young folk who still have a ways to go to retirement, and I liked how you concluded that investing early in the year resulted in more time spent compounding. For those of us who find ourselves on the other side of retirement, does taking our RMD later in the year work the same way—leave money in the tax-deferred account until the last minute?
Another IVA reader asked it this way:
In a recent article, you say that it is best to invest additional funds in a tax-deferred account early in the year to take advantage of the fact that, in most years, the stock market goes up. What about taking required minimum distributions? Is it best to take those early or late in the year?
It’s a great question. My initial reaction is that time in the markets applies to young and experienced investors alike—meaning you should take your required minimum distribution as late in the year as possible. But let’s put that to the test!
RMD Basics
Starting at the beginning: Retirement accounts like traditional IRAs, 401(k)s, and 403(b)s are powerful account vehicles. You can contribute pre-tax dollars to these accounts and watch them grow unimpeded by taxes.
Of course, the IRS will eventually want their cut, which is where required minimum distributions (RMDs) come in. Once you reach a certain age, by law, you must start taking money out of your retirement accounts. The money you withdraw is taxed as income.
The total balance of all your retirement accounts at the end of the preceding year divided by your life expectancy determines how much you are required to withdraw. So, to determine your RMD for 2024, sum your retirement account balances on December 31, 2023, and divide it by the appropriate number for your age and situation. (You can find that here.)
In the past, the IRS required that you begin taking RMDs when you turned 72 (before that, it was 70 ½). Now, the magic age is 73.
If you turn 73 this year, you’ll have to take your first RMD based on your December 31, 2023 account value before April 1, 2025 (the year after you turn 73). Subsequent RMDs must be taken each calendar year by December 31. (So, if you delay your first distribution until 2025, you’ll have to take two distributions in that calendar year.)
Keep in mind that if you have multiple retirement accounts, you must calculate the RMD for each one separately. However, you can take your total RMD from one or a combination of accounts.
I’m only covering the basics here in an effort to set the stage for answering the question of when during the year you should take your RMD. Unfortunately, the rules around RMDs are complicated and very specific.
For example, they vary depending on whether you are the account's original owner or if you inherited it. Also, IRAs are governed slightly differently than defined contribution plans like 401(k)s. And, of course, Roth IRAs don’t require distributions until they are inherited.
The penalties for missing or messing up your RMD can be steep. So, if you have questions or concerns, please consult your tax professional. Or, if you want to get into the nitty-gritty yourself, you can find the IRS’s guidance on RMDs for 2023 here and here.
Early or Late?
Now, let’s consider whether you should take your RMD early or late in the year.
To answer that question, I compared two retirees.
Both retire simultaneously and with the same balance in their retirement account. (I used $1 million as a simple, round number.) Both investors intend to hold a diversified portfolio of 60% stocks and 40% bonds throughout retirement.1 Where they differ is that one retiree takes his RMD early in the year (at the end of January) while the other takes hers late in the year (at the end of November).
To determine each retiree’s annual RMD, I used the IRS’s current uniform lifetime table (Table III) to find their life expectancy. This is the most widely used table as it applies to unmarried IRA owners and owners whose spouses are within ten years of their age. (For the record, I also ran the numbers using Table I, which covers inherited IRAs, using 72 as the starting age. The conclusion is the same.)
I ran the analysis, looking at account balances, withdrawals and the timing of those withdrawals over 25-year periods. So, the first calculations ran from 1976 to 2001, the next from 1977 to 2002, then 1978 to 2003 and so on.
The last period I looked at started at the end of 1999. Since 2024 isn’t over yet, I don’t quite have the final period’s results, but we know the balances at the end of the 24th year (2023) and the required 25th withdrawal amount.
The table below compares how much each retiree withdrew from their portfolio and their final balances after 25 years.