If I withdraw from my IRA before age 75, will it affect my RMDs?

A Required Minimum Distribution (RMD) is the minimum amount of money the IRS mandates you must withdraw annually from a tax-deferred retirement account like a traditional IRA. The purpose behind RMDs is to ensure taxes are eventually paid on pre-tax contributions and earnings.

Withdrawing money from your IRA before age 75 does not count toward your RMD because you’re not required to withdraw funds until age 73 (or 75 if you were born in 1960 or later). However, you may find that withdrawing money before age 75 indirectly impacts your eventual RMDs. Here’s how.

RMD calculation

Your RMD is calculated based on two factors: your IRA account balance as of December 31 of the previous year and your life expectancy factor, as determined by the IRS tables. Again, withdrawing funds before age 75 won’t directly affect your RMDs, but it will indirectly impact your account balance in subsequent years.

The hope behind any retirement account is that you can make regular withdrawals, and the remaining funds in the account will grow enough to last you the rest of your life.  If you ever feel the need to make an unplanned withdrawal from your IRA, your best bet is to meet with a financial advisor who can calculate how an unexpected withdrawal is likely to impact future RMDs and ensure you have a plan in place to protect the remaining funds.

Early withdrawals

If you take money from your IRA before reaching 59 ½, you’re likely to run into another indirect impact in terms of opportunity cost. Opportunity cost refers to what you sacrifice by choosing one option over another.

In this case, you are choosing to withdraw money from your IRA and pay the penalty rather than allowing it to continue growing in your retirement account. While we can’t know for sure how much this decision will cost, we can make an educated guess.

Let’s say your traditional IRA enjoys an average annual return of 7%, and you withdraw $20,000. You’re already $2,000 out of pocket, thanks to the 10% penalty incurred. In addition, if you’d allowed the $20,000 to continue growing for 15 ½ years (when you turn 75 and must begin taking RMDs), that $20,000 would be worth $57,079 — $37,079 more.

In total, the decision to take the money early would cost you over $39,000 (that’s $2,000 for the penalty and $37,079 in growth).

Even if you planned to begin taking withdrawals at age 67, the opportunity cost of taking the money before 59 ½ could be $15,220 (a $2,000 penalty and $13,220 in lost growth). 

Tax concerns

Since RMDs are considered taxable income, any withdrawal could impact your overall tax situation. Let’s say you receive a nice bonus the year you retire. If you haven’t hit a mandatory RMD age just yet, you may decide that your best move is to keep your overall annual income (and tax bill) down by waiting a year to make your first IRA withdrawal.

Having to consider the impact of the funds in your IRA is a good problem to have. After all, it indicates that you’ve been steadily putting money away for retirement. The goal is to mentally sketch your plan out ahead of time so you’re never hit with a penalty or a hefty tax bill.