Understanding Required Minimum Distributions (RMDs) and Distribution Timing Options
For Educational Purposes Only – Not Individualized Tax or Investment Advice
This memorandum explains (1) the basic rules governing Required Minimum Distributions (RMDs) from individual retirement accounts (IRAs), (2) how RMDs are calculated, and (3) the considerations surrounding the timing of RMD withdrawals. This information is provided for general educational purposes only. Clients should consult with their tax advisor regarding their individual circumstances.
1. What Is a Required Minimum Distribution (RMD)?
The IRS requires owners of traditional IRAs and certain employer-sponsored retirement plans to withdraw a minimum amount each year beginning at the “required beginning date.” Under current law (SECURE Act 2.0), individuals must generally begin RMDs at age 73.
RMD rules apply to:
- Traditional IRAs
- SEP IRAs
- SIMPLE IRAs
- Most employer retirement plans (subject to plan rules)
Roth IRAs owned by the original account holder are not subject to RMDs during their lifetime.
RMD Penalties:
Failure to take an RMD can result in an IRS excise tax of 25% of the amount not withdrawn. If corrected in a timely manner (generally within two years), the penalty may be reduced to 10%.
(Sources: IRS Publication 590-B; SECURE 2.0 Act, 2023 updates.)
2. How RMDs Are Calculated
Each year’s RMD is calculated using:
- The retirement account balance as of December 31 of the prior year, and
- A life-expectancy factor from the IRS Uniform Lifetime Table (or other IRS table if applicable).
Illustrative Example
- December 31 IRA value: $720,000
- Age during distribution year: 73
- IRS Uniform Lifetime Table factor: 26.5
RMD Calculation:
$720,000 ÷ 26.5 ≈ $27,170
Actual RMDs may differ due to portfolio value changes, updated IRS tables, or unique circumstances.
3. Distribution Timing Options
RMDs must be taken by December 31 each year. The first RMD may be delayed until April 1 of the following year, but doing so results in two RMDs in that year.
Common timing strategies include:
A. Year-End Withdrawal
- Maximizes annual tax deferral
- Useful for coordinating tax planning, QCDs, or Roth conversions
- Requires careful deadline management
B. Beginning-of-Year Withdrawal
- Provides immediate liquidity
- Ends tax deferral earlier
- Appropriate when funds are needed for spending or reinvestment outside the IRA
C. Quarterly or Monthly Withdrawals
- Provides predictable cash flow
- Smooths taxable income over the year
- Reduces concentration risk of a single sale date
4. Investment Considerations for RMD Funds
Some investors maintain enough liquidity—via cash, money markets, or short-term fixed income—to satisfy annual RMDs without selling equities. In such cases, timing decisions revolve primarily around tax strategy and convenience.
However, investors heavily allocated to equities with limited liquidity face additional risks when funding RMDs.
A. When RMD Funds Are Held in Cash or Short-Term Fixed Income
- The value of the RMD amount is stable
- No need to sell equities to meet IRS requirements
- Timing can be optimized strictly for tax planning
B. When the Investor Is Primarily Invested in Equities with Limited Liquidity
- Market-Timing Risk
- Equity values fluctuate significantly
- A single withdrawal date could coincide with a market downturn
- Selling after a decline may require liquidating more shares to raise the same dollar amount
- Impact on Long-Term Portfolio Sustainability
Selling shares during downturns may:
- Accelerate depletion of equity holdings
- Impact long-term growth potential
- Increase exposure to sequence-of-returns risk
- Benefits of Spreading Withdrawals Over Time
Monthly or quarterly withdrawals may:
- Reduce sensitivity to any single market level
- Distribute sales across different conditions
- Moderate volatility effects
- Liquidity Planning Strategies
Investors with limited liquid assets may consider:
- Building a dedicated liquidity sleeve
- Rebalancing periodically to maintain liquidity
- Implementing a multi-year withdrawal plan
These decisions should be coordinated with a financial advisor and tax professional.
5. Important Disclosures and Disclaimers
- Not Tax or Legal Advice: This material is for general informational purposes only. Clients should consult their tax advisor or attorney regarding their specific situation.
- No Investment Guarantees: Investments, including money markets and bonds, carry risk and may lose value.
- IRS Rules May Change: RMD ages, tables, and penalties are subject to legislative and regulatory updates.
- Individual Circumstances Vary: Distribution timing approaches may not be suitable for all clients.
- Responsibility for RMD Compliance: The account owner is ultimately responsible for satisfying RMD requirements.
- Qualified Charitable Distributions: Special rules apply for QCDs; professional guidance is recommended.
- Not a Recommendation: Nothing herein constitutes individualized investment or tax advice.
6. Next Steps
If you would like help with:
- calculating upcoming RMDs,
- planning distribution timing,
- evaluating liquidity needs, or
- integrating RMDs into your overall retirement strategy,
please contact our office. We are available to coordinate planning with your tax advisor and develop a strategy appropriate for your goals.
Important Disclosures
© 2025 Crosswalk Investment Advisory, Inc. All rights reserved.
Crosswalk Investment Advisory, Inc. (“Crosswalk”) is a Registered Investment Adviser.
Registration does not imply any level of skill or training.
This material is provided for informational and educational purposes only and should not be construed as personalized investment, tax, or legal advice. The information contained herein is obtained from sources believed to be reliable, but accuracy or completeness cannot be guaranteed. Past performance is not indicative of future results. All investments involve risk, including the possible loss of principal.
Clients should consult their tax professional regarding the tax implications of any strategy discussed. For additional information, please refer to Crosswalk’s Form ADV, available upon request.