The Case for Taking Retirement Plan Distributions Earlier in the Year
An RMD (Required Minimum Distribution) is the minimum amount you must withdraw from certain retirement accounts each year once you reach a specific age. The IRS mandates these withdrawals to ensure that retirement funds are eventually taxed rather than left to grow tax-deferred indefinitely. The rules governing these distributions are complex and have changed significantly over the last several years, making it essential to stay informed.
One of our goals is to provide clients with strategies to manage the potentially significant tax liability that comes with RMDs. For example, one strategy is to consider utilizing Qualified Charitable Distributions (QCDs), which can offset some or all of the tax impact from RMDs (learn more on page 12 & 13 of our 2024/2025 Perspectives Booklet).
But here’s a lesser-known tax planning opportunity—distribution timing matters. Strategically deciding when to take your RMDs or QCDs during the year can make a meaningful difference in your overall tax situation.
If you have an account that is subject to an RMD, your required distribution for the current year is calculated from the account’s value as of December 31st of the previous year. Beginning in January of the current year, you can take all or part of your required distribution at any time throughout the year, but the full amount must be distributed by December 31st of the current year to avoid potential tax penalties.
The Advantages of Taking RMDs Early
Taking RMDs earlier in the year can offer key advantages:
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Protection from market volatility:
By withdrawing the required amount sooner, you reduce the risk of market fluctuations impacting your RMD. While net proceeds from the distribution can still be reinvested in a taxable account, the distribution amount in your retirement account is no longer exposed to market volatility.
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Avoiding last-minute issues:
Taking the distribution earlier in the year helps ensure that you meet the full requirement. Waiting until the end of the year increases the risk of miscalculating or missing the deadline, which could result in tax penalties on any undistributed amount.
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More control over cash flow and budgeting:
By taking your RMD early, you can better plan for expenses, tax withholding, and reinvestment strategies throughout the year rather than scrambling at year-end.
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Strategic tax planning:
If you take your RMD early, you have more flexibility to adjust other income sources, charitable giving (via QCDs), or tax withholding strategies throughout the year to optimize your tax situation.
QCDs: A Powerful Tax-Saving Strategy
An individual becomes eligible to make a QCD from a retirement account once they are age 70 ½. This includes inherited IRAs if the inheritor is age 70 ½ or older. For 2025, the maximum allowable QCD is $108,000 per individual. A QCD can be counted toward satisfying your RMD and isn’t included in your taxable income. To qualify, the QCD amount must be sent directly from the retirement account to a qualified charity.
As we noted above, timing matters. It is crucial to take the QCD before withdrawing any RMD funds—if you take your RMD first, you cannot retroactively apply a QCD to offset taxable income.
Work with Your Advisor to Maximize Your Strategy
We recommend that you work with your advisor to determine the optimal timing for any QCDs and RMDs. Deciding on the appropriate QCD amount (if any) and executing the distribution early in the year—followed by completing any necessary RMDs—allows you and your advisor ample time to optimize your distribution strategy and enhance tax planning efficiency.
Remember: We’re Here to Help
Please remember we are always here to help with any questions you have about your tax or financial planning. Our goal is to assist you in making the most of your retirement strategy.
