When Should Clients Take Their RMDs? We May Be Optimizing the Wrong Thing

Consider the Year of Death

Consider an 85-year-old client with three children as beneficiaries of his traditional IRA. He normally takes his RMD in December. This year, he dies in September before taking it.

His RMD doesn't disappear. Because he died after his required beginning date, his beneficiaries become responsible for satisfying his remaining year-of-death RMD. From the advisor's perspective, this routine annual RMD might have turned into herding cats.

His children may be arranging a funeral, obtaining death certificates, securing his home, locating documents, notifying institutions, administering his trust or estate, and transferring investment accounts, all while dealing with grief and a changed family dynamic. Now they also need to determine his RMD, confirm how much he had already taken, establish inherited accounts, and coordinate the remaining distribution.

With several beneficiaries or several IRAs, that coordination can become tedious, particularly because the remaining RMD need not be divided pro rata among them.

The 2024 RMD regulations provide some relief. If beneficiaries miss the year-of-death deadline, the excise tax is automatically waived if the missed RMD is distributed by the end of the following calendar year, or by the beneficiary’s applicable tax-filing deadline, including extensions, if later.

But additional time doesn't eliminate the task. It may also create another tax-planning issue. A beneficiary who delays the decedent's RMD into the following year will generally also have a separate inherited-account RMD for that year. Taxing both in the same year, rather than spreading them across two years, could increase marginal-rate and threshold exposure.

What looked like one small unfinished task can become a tax-planning problem.

What Is the Benefit of Waiting?

The traditional argument for taking an RMD late in the year is straightforward: money left inside the IRA continues to compound tax-deferred for a little longer.

A recent Morningstar article makes the case and illustrates it by comparing an RMD taken and spent early in the year with one left invested until year-end.

But spending needs don't depend on when an RMD is taken.

If someone needs the money during the year, delaying the RMD means spending has to come from somewhere else. Cash must be used, another investment sold, or money borrowed. Each alternative has its own cost, opportunity cost, or risk. Taking money needed for near-term spending out of a volatile portfolio early can also be a form of risk management, regardless of what the market subsequently does.

If the RMD isn't needed for spending, it can be reinvested as soon as it's distributed. The money stays invested either way; the main thing that changes with timing is which account holds one year's growth on the RMD amount. Waiting keeps that growth inside the tax-deferred IRA a little longer; taking it early puts that growth in a taxable account.

Which is better depends on the asset type, ordinary-income and capital-gains tax rates, how long the money will remain invested, and whether the taxable account is likely to receive a step-up in basis.

Bonds generally benefit more from remaining inside an IRA than tax-efficient stocks. Growth retained in a traditional IRA also carries a future ordinary-income tax liability, while appreciation in a taxable account may eventually receive long-term capital-gains treatment or a basis adjustment at death.

Waiting, then, does not necessarily confer an economic advantage. Whether the market rises or falls, timing primarily affects where one year's RMD return lands and how that return is eventually taxed. Depending on the circumstances, that can favor taking the RMD early or waiting until later, and the difference may be quite small. More importantly, it is far narrower than a comparison between money left invested and money taken out and spent.

The planning question is whether waiting to complete the RMD produces enough potential benefit to justify the trade-offs.

Timing Is a Risk Decision

Suppose a retiree knows she will need part of her RMD for living expenses during the year. She could take the RMD early and hold the expected spending in a stable account rather than leaving money she needs soon exposed to market fluctuations.

If stocks subsequently rise, that doesn't mean the decision was wrong.

Risk management shouldn't be judged solely by whether the risk materialized. Car insurance isn't valuable only in years when we have an accident.

Alternatively, the retiree can take distributions as spending needs arise. That may work perfectly well for cash flow.

But installments accomplish something different from completing the RMD. From an estate-administration standpoint, a partially completed RMD is still an unfinished RMD. Taking 90% before death may reduce the dollar amount beneficiaries need to distribute, but it leaves 100% of the administrative task of resolving an unfinished RMD.

From that standpoint, completion is all or nothing.

Reasons to Keep Some Flexibility

There are legitimate reasons not to complete an RMD as soon as possible.

Qualified charitable distributions (QCDs) may satisfy all or part of an RMD from a traditional IRA, but only to the extent that the RMD hasn't already been satisfied. A client who completes the RMD in January can still make tax-free QCDs later in the year, but those QCDs no longer reduce that year's taxable income the way they would have if they had come out first. If charitable plans are already known, QCDs can be made early. Someone who is still deciding how much to give, however, may reasonably wait for the current-year tax forecast to clarify before completing the RMD.

Tax withholding is another consideration. Withholding from an IRA distribution can be particularly useful late in the year because federal withholding is treated as paid evenly throughout the year for estimated-tax penalty purposes.

If the expected tax liability is reasonably known early, however, withholding can accompany an early RMD.

Even an unexpected late-year tax payment shortfall doesn't necessarily require leaving the RMD unfinished. After the annual RMD has been fully satisfied, an additional IRA distribution could be eligible for a 60-day rollover. Although the RMD itself cannot be rolled over, a taxpayer could potentially take an additional distribution to pay tax-withholdings (treated as paid ratably throughout the year) and replace the entire gross distribution within 60 days using outside funds.

That "erase and replace" technique is better viewed as a safety valve than a routine strategy. It requires sufficient liquidity, creates additional tax reporting, and generally uses the taxpayer's one permitted IRA-to-IRA 60-day rollover for the 12-month period.

But it illustrates a larger point: Preserving flexibility doesn't always require leaving the RMD itself unfinished.

Pretend December Doesn't Exist

There is no prize for getting closest to December 31.

There is, however, a consideration that doesn't appear in any investment calculation: December is busy.

Clients travel. Advisors take time off. Custodians face heavy processing volumes. Charitable organizations need time to receive checks. Tax planning accelerates. Families have holiday obligations.

There can be value in pretending the financial year ends in November.

Complete the tasks that can reasonably be completed earlier, leave December for imponderables, and enjoy the holidays without self-imposed pressure.

What Are We Trying to Optimize?

For a healthy client with one beneficiary who does not need the RMD for spending, waiting may make good sense. The client may prefer the incremental tax deferral and be comfortable leaving the RMD unfinished while charitable and withholding decisions develop.

For an older client in declining health with several beneficiaries and several retirement accounts, completing the RMD early may accomplish something more valuable: leaving one less untimely task for the family.

Health and expected longevity matter. Beneficiary structure matters. Spending needs matter. QCD intentions matter. Tax-withholding needs matter. So does the client's preference for simplicity and completion.

The December default is often not a deliberate choice at all. Inertia simply meets deadlines. It could also be a tradition from the accumulation years, when deferring everything as long as possible was the right instinct. In the distribution years, that instinct deserves to be examined rather than assumed.

None of this means everyone should take an RMD in January.

Instead, we should start by evaluating what the client is trying to accomplish.

Good retirement and estate planning aren't math problems to solve. They are preferred futures to optimize.

Jean-Luc Bourdon is a CPA and the founder of Lucent Wealth Planning.

Original text, structure, organization, and editorial revisions created by the human author. The author used AI as a drafting tool, but exercised creative control by rewriting, restructuring, and contributing original analysis, tone, and expression. Disclosure in accordance with U.S. Copyright Office guidance on AI-assisted works.

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