“There may be advantages to withdrawing annual required minimum distributions from qualified retirement plan accounts and Individual Retirement Accounts at the beginning of each distribution calendar year, rather than at or near the end of each distribution calendar year. Advantages may include greater after-tax return on investment.”

Mike Jones provides members with his analysis for early RMD withdrawals at the beginning of each distribution calendar year.

Michael J. Jones, CPA is at Thompson Jones LLP (email: mjj@tj-llp.com). His tax consulting practice focuses on tax-efficient wealth transfer strategy, including maximizing the value of inherited retirement benefits, and trust and estate tax matters. Mike is the author of several books and has written numerous articles published in Leimberg Information Services, Inc., Trusts & Estates, WealthManagement.com, Ed Slott's IRA Newsletter and elsewhere. He serves as chair of the CPE Forum of the Central Coast and formerly served as chair of Trusts & Estates magazine's Retirement Benefits Committee. Mike has lectured across the U.S. for Jerry A. Kasner Estate Planning Symposium, Southern California Tax & Estate Planning Forum, Hawaii Tax Institute, AICPA Advanced Estate Planning Conference, AICPA Conference on Tax Strategies for the High-Income Individual, UCLA-CEB Estate Planning Institute, New York University Institute on Federal Taxation, and others. He has been quoted in Natalie Choate's Life and Death Planning for Retirement Benefits, Keith Schiller's Estate Planning At The Movies®  Art of the Estate Tax Return, New York Times, Forbes Magazine, and The Wall Street Journal.

Here is his commentary:

EXECUTIVE SUMMARY:

There may be advantages to withdrawing annual required minimum distributions from qualified retirement plan accounts and Individual Retirement Accounts at the beginning of each distribution calendar year, rather than at or near the end of each distribution calendar year. Advantages may include greater after-tax return on investment.

FACTS:

Qualified defined contribution retirement plans authorized under Internal Revenue Code Section 401(a)(9), as well as Individual Retirement plans under Internal Revenue Code Section 408 (other than ROTH IRAs) under are subject to required minimum distributions (“RMDs”) during the lifetime of a plan participant or IRA owner, commencing after a covered employee or Individual Retirement Account.

QUESTION:

Is there any advantage to withdrawing annual required minimum distributions from qualified retirement plan accounts and Individual Retirement Accounts at the beginning of each distribution calendar year, rather than at or near the end of each distribution calendar year?

ANALYSIS:

Typical portfolio investments produce both income and capital gains due to growth.  Nevertheless, all distributions from a retirement account are classified as ordinary income, and so are taxed at ordinary income tax rates – including where capital gains are realized within the retirement account.  By making retirement account distributions at the beginning of the year, post distribution capital gains realized on the distributed property cannot be treated as ordinary income. Capital gains will occur only when a taxable sale or exchange occurs. In addition, if there are unrealized capital gains upon death, the property will receive fresh basis.

However, if the participant’s investment strategy focuses heavily on holdings that primarily produce ordinary income, this would not hold true. In such a case, there would be more of an advantage to withdrawing the distribution at the end of the calendar year.

HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE!

Mike Jones

CITE AS:   

LISI Employee Benefits Newsletter #853 (June 3, 2025) at http://www.leimbergservices.com. Copyright 2025 Leimberg Information Services, Inc. (LISI). Reproduction in Any Form or Forwarding to Any Person Prohibited - Without Express Permission. Our agreement with you does not allow you to use or upload content from LISI into any hardware, software, bot, or external application, including any use(s) for artificial intelligence technologies such as large language models, generative AI, machine learning or AI system. This newsletter is designed to provide accurate and authoritative information regarding the subject matter covered. It is provided with the understanding that LISI is not engaged in rendering legal, accounting, or other professional advice or services. If such advice is required, the services of a competent professional should be sought. Statements of fact or opinion are the responsibility of the authors and do not represent an opinion on the part of the officers or staff of LISI.

CITATIONS:

Internal Revenue Code Sections 401(a)(9), 408.