Should You Take Your First Required Minimum Distribution (RMD) Early or Late? Here's the Financial Impact.

As you approach your 70s, you should start learning about and planning for your required minimum distributions (RMDs) -- and when you'll take them. (Doing so decades earlier is not a bad idea, either, as that may lead you to save for retirement in certain kinds of retirement accounts and not others.)

One question many ponder is whether to take their first RMD early or late. Let's take a look at this topic, as there are some important financial ramifications to consider.

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Meet the required minimum distribution requirement

Tax-advantaged retirement accounts such as IRAs and 401(k)s can be powerful tools to help you save and invest for retirement. Understand, though, that once you reach a certain age, some of those accounts will require that you take RMDs.

The Internal Revenue Service (IRS) requires you to take RMDs annually from accounts such as traditional IRAs, SEP IRAs, and SIMPLE IRAs once you reach the age of 73. (Roth accounts do not feature RMDs for the original owners of the accounts.) As you get older, if you don't tap your account except for your RMDs, the size of your RMDs will increase.

When you take your RMD, that income will count as taxable income to you -- so it's smart to plan for it when you're developing your retirement plan. You can calculate your RMD by referring to an RMD table, but your brokerage might do the math for you.

When to take your first RMD

You have until April 1 of the year after you turn 73 to take your first RMD. After that, though, the deadlines fall on Dec. 31. So your second RMD will be due on Dec. 31 of the year you turn 74.

Here, then, are three key options, assuming you're turning 73 in 2026:

• You could take your first RMD in 2026 and your second in 2027.
• You could take your first RMD in 2027 (by April 1) and your second in 2027 as well (by Dec. 31).
• You could stagger your withdrawals in some other fashion. Your annual RMD doesn't have to be taken all at once. The total required amount simply needs to be withdrawn by the deadline.

A key benefit of taking your first in 2026 and the next in 2027 is that you spread that income across two tax years. If you take them both in 2027, your taxable income will increase more that year. If it pushes you into a higher tax bracket, that could leave you owing more in taxes.

Another consideration is the overall market. Assuming your retirement account is mostly invested in stocks, if you take your withdrawal early, you may miss out on some gains you may have enjoyed had the money lingered longer in the account. But we never know what the stock market will do from month to month, so delaying taking your RMD might force you liquidate some stocks after a pullback.

Those who don't like the idea of having an RMD hanging over their head all year could do well to just take it early in the year and be done with it. (Note that many, if not most, good brokerages will let you automate your RMDs, taking them automatically for you at a date you specify.)

Don't be late

Here's an important caution: Don't be late taking your RMD. If you fail to take your full RMD on time, you'll likely pay a steep price -- as the penalty for not taking them on time is 25% of the amount you failed to withdraw on time. (You may be able to pay a smaller penalty if you notice that you just missed the deadline and take action quickly.)

So if you didn't take your $8,000 RMD on time, you may have to pay a $2,000 penalty -- ouch!

Take some time to get savvier about retirement accounts, RMDs, and tax matters. You may end up saving yourself a lot of money.

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