Taking Your RMD in January vs. December: Which Strategy Makes Sense for You?
Key Points
Required minimum distributions (RMDs) begin the year you turn 73.
Failing to take your RMDs can result in a penalty of up to 25% of the amount you didn't withdraw.
Some people may want to approach RMDs with a hybrid mindset.
- The $23,760 Social Security bonus most retirees completely overlook ›
If you own a tax-deferred account like a 401(k) or traditional IRA, you must begin withdrawing from those accounts the year you turn 73 years old. These are called required minimum distributions (RMDs).
You must take your RMD by Dec. 31 to avoid penalties. The only exception is the year you turn 73, in which case you'd have until April 1 of the following year to take your RMDs. Failing to take your RMDs will result in a penalty of 25% of the amount you failed to withdraw. If your mistake is corrected within two years, the penalty may be reduced to 10%.
Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now, when you join Stock Advisor. See the stocks »
While some people choose to get their RMDs out of the way early in the year, others prefer to handle them at the last minute. Neither is right or wrong, but which route is best for you?
Image source: Getty Images.
Determining the amount of your RMD
The amount of your RMD is based on two things: your life expectancy factor (LEF) and your account value at the end of the previous year. The IRS provides your LEF for you based on your age.
Most people will use the Uniform Lifetime table for their LEF. However, if your sole beneficiary is your spouse who is more than 10 years younger than you, you'll use the Joint Life and Last Survivor Expectancy table.
For example, someone who's 75 years old and uses the Uniform Lifetime table has a LEF of 24.6. This means that if they had $1 million in a 401(k) at the end of 2025, their 2026 RMD would be $40,650.40.
Is it better to take your RMD early or late in the year?
By taking RMDs in January, you reduce the risk of forgetting them. You can take the RMDs early, set up automatic monthly distributions, and essentially treat it as a paycheck. It can also lower any anxiety that comes with trying to anticipate where the market may be in December when you're "forced" to take RMDs.
The biggest reason to take RMDs in December is to give your money and investments more time to (ideally) grow. Of course, this isn't guaranteed, but in years where the market performs well, waiting could mean thousands more in your account.
Luckily, you don't have to take all your RMDs in either January or December. Many people use a hybrid approach or choose to take their RMDs in monthly or quarterly installments. This can provide the best of both worlds in many cases: cash flow and leaving time for some of your investments to continue growing.
The $23,760 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income.
One easy trick could pay you as much as $23,760 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Join Stock Advisor to learn more about these strategies.
View the "Social Security secrets" »
The Motley Fool has a disclosure policy.
Recommended Articles
