The Case For and Against Taking Your RMD Early in the Year

By Jeffrey Levine, IRA Technical Expert
Follow Me on Twitter: @IRAGuru4EdSlott

One of the most common questions that an IRA owner subject to RMDs (required minimum distributions) asks is, “When should I take my RMD? Is it better to take the RMD early in the year? Later in the year?”

There’s really no right or wrong answer, but rather, depending on your personal situation, either might make sense. Here are a few factors to consider when making your decision.

Reasons to Consider Taking Your RMD Now

You don’t have to worry about the 50% penalty – RMDs must generally be taken by the end of the year for they are being taken in order to be considered timely. For example, an RMD for 2015 must generally be taken by December 31, 2015 (there is an exception to this rule for the first year you are required to take an RMD). Although IRS can provide relief in certain circumstances, if you miss the deadline, you leave yourself subject to a 50% penalty, assessed on the amount you were supposed to take, but did not.

Although December 31 may seem like a long way off, it might be worth considering taking your RMD now to avoid any potential for error. It’s not uncommon for people to hold off on taking their RMD until later in the year, only to forget, become ill or otherwise preoccupied, leading to a missed deadline. There’s a lot of issues to worry about in retirement, but if you take your RMD early in the year, a 50% penalty doesn’t have to be one of them.

Don’t leave beneficiaries with a tight window – If you’re subject to RMDs this year, and you pass away before the end of the year, your beneficiaries are required to take what would have been your RMD. In order to avoid a potential penalty, they should take that distribution before the end of the year. The longer you wait to take your own RMD, the more difficult it becomes for your beneficiaries to take your remaining RMD if you die before taking it.

It’s important to realize that in order for a beneficiary to set up an inherited IRA, they must often provide proof of an IRA owner’s death, such as a death certificate. At best, it may take days to receive a death certificate, and at worst it can take several months or longer. Plus, inherited IRAs can only be funded via a trustee-to-trustee transfer from a decedent’s account. Moving money this way can also take several weeks in some cases.

Add all of this together and it’s easy to see why it may be next to impossible for a beneficiary to take a deceased IRA owner’s remaining RMD by the end of the year if the death occurs late in the year. Taking the RMD now eliminates this issue.

You can convert or rollover the remainder of the account – RMDs are considered the first money distributed out of an IRA owner’s account each year. Furthermore, RMDs are not eligible to be rolled over. Put those two rules together and you come to the realization that, before you make any rollover – including a Roth IRA conversion – you must take your RMD for the year. Let me say that a little differently.

Unless you’ve already taken your RMD, you cannot make a Roth IRA conversion or complete a 60-day rollover (transfers are not impacted).

Failure to take an RMD before completing a rollover or making a Roth IRA conversion often leads to serious tax issues. For instance, the RMD that was errantly rolled over or converted becomes an excess contribution, subject to a 6% penalty for each year until it is corrected. Retirement is hard enough without subjecting yourself to unnecessary penalties. By taking your RMD now, before you make a rollover or a Roth IRA conversion, you can eliminate this error.

Reasons to Wait Until Later This Year to Take Your RMD

Giving up tax deferral – When it comes to IRAs, tax deferral is the name of the game. The longer your money stays in an IRA, the longer any earnings are shielded from taxes. That’s why it’s so important to make contributions as early in the year as possible when you’re accumulating money in an IRA, and also why it can pay to delay taking RMDs until later in the year once you start taking your distributions.

By waiting until the end of the year to take your RMD instead of taking it now, you can give yourself almost a full year’s additional tax deferral on your RMD. Any interest, dividends, capital gains, etc. that are earned on the RMD between now and when you take it will occur inside the IRA, and therefore, they will not be subject to income tax this year unless distributed from the IRA in addition to the RMD. This may not seem very significant, but over time, delaying your RMD until later in the year can have a meaningful impact on the size of your remaining nest egg.

No QCD provision currently in place – As of now, qualified charitable distributions (QCDs) are not in effect for 2015. The QCD provision allows certain IRA owners age 70 ½ or older to give up to $100,000 tax-free to charity directly from their IRAs. Perhaps best of all, the amount of any QCD you make can be used to offset, or eliminate altogether, your RMD for the year.

There’s a good chance that, at some point, Congress will retroactively institute the QCD provision so that it would be effective now. They’ve done so each time it’s expired in the past (like a few weeks ago for 2014). That said, there’s no guarantee they will do so again. They could just make it effective from the time they pass the legislation (if that even happens). Therefore, if you want to utilize this provision (should it be renewed), you may want to wait until later this year to take your RMD. By then, hopefully there will be some clarity on the issue.