Retirees must decide the optimal time within a given year to take their Required Minimum Distributions (RMDs). This decision involves weighing the benefits of early withdrawal against delaying until the end of the year, or opting for monthly or quarterly installments.

The Impact of RMD Timing on Compounding Returns

Advantage of Delaying: Extra Tax-Deferred Compounding

The primary benefit of delaying an RMD until later in the year is securing a small amount of additional tax-deferred compounding on the funds remaining in the account.

Consider a hypothetical 75-year-old, Anne, whose IRA totaled $1 million at the close of 2025, resulting in a 2026 RMD of $40,650. If Anne withdrew and spent this amount at the start of 2026, and the remaining balance earned 12% that year, her year-end 2026 balance would be $1,074,472.

However, if she postponed the distribution until year-end 2026, her full $1 million would earn 12% interest for the entire year. After the $40,650 withdrawal, her IRA would stand at $1,079,350. This illustrates the benefit of having more capital invested for the ahead.

The Risk of Delaying: Market Volatility

The advantage of compounding works both ways, depending on market performance. If Anne’s account lost 12% in 2026, she would have been better off withdrawing the RMD early.

Taking the distribution earlier would have reduced the principal amount exposed to potential market losses. Despite this risk, stocks and bonds tend to appreciate more frequently than they decline, often favoring the strategy of delaying withdrawals.

Considerations for Smaller Investors and Roth Conversions

For smaller investors, the tax-deferred compounding benefits of delaying may be negligible. The post-RMD period is typically shorter than the accumulation phase, limiting the compounding effect.

Furthermore, many retirees hold more conservative portfolios, which yield lower returns, further minimizing the impact of delaying the distribution.

Two critical reasons to take RMDs early include avoiding a tight window for heirs if the retiree passes away late in the year, and clearing the RMD requirement before executing any Roth IRA conversions.

Alternative Strategies: Installment Withdrawals

Ensuring Regular Cash Flow and Price Averaging

Taking distributions in installments—semiannually, quarterly, or monthly—provides a significant advantage by ensuring regular cash flow from the retirement portfolio.

Installment withdrawals also help ensure that assets are sold across a range of market prices. This method prevents the retiree from selling assets only at the absolute best or worst moment of the year.

Trade-offs of Installment Withdrawals

While installment withdrawals offer cash flow stability, they only capture some of the tax-deferred compounding benefits enjoyed by those who wait until year-end. Most financial institutions offer services to automate these scheduled disbursements.

Risks of Manual Withdrawals

If a retiree manages RMDs manually instead of using automated services, there is an inherent risk of miscalculation or failing to complete all required distributions, potentially leading to penalties.