The Hidden Costs of RMDs: Why Transaction Fees Matter More Than You Think

Bottom Line Up Front

• Frequent RMD withdrawals may look smart, but transaction fees can quietly drain thousands from your retirement income
• A $100 fee on monthly withdrawals can eat up more than 16% of annual distributions, undermining the benefits of a steady withdrawal strategy
• Simple fixes like consolidating withdrawals, rolling over to an IRA, or choosing a no-fee custodian can protect more of your money

You planned carefully, saved for years, and finally retired. But what if something as small as a $100 fee could quietly add up to thousands of dollars from your nest egg? For many retirees taking Required Minimum Distributions (RMDs), that’s exactly what may be happening.

RMDs are mandatory withdrawals that the IRS requires once you reach a certain age, designed to ensure the government eventually collects taxes on tax-deferred retirement accounts.

A recent Wall Street Journal article highlighted a new trend: more retirees are taking their RMDs in smaller, regular installments rather than in a lump sum each year. On paper, this approach resembles dollar-cost averaging in reverse, spreading out withdrawals to reduce timing risk.

Here’s the catch: while the strategy looks smart in theory, transaction fees can turn it into a pretty costly mistake if you’re not careful.

The Appeal of Dollar-Cost Averaging in Retirement

At first glance, spreading out your RMDs through smaller, regular withdrawals seems like a safe and disciplined approach. The idea, often called “reverse dollar-cost averaging,” is that by taking steady payments throughout the year, you can reduce the risk of bad timing.

Instead of worrying about pulling a lump sum right before a market downturn, you smooth withdrawals across different points in the market cycle. For many retirees, this method also provides a sense of stability, almost like receiving a paycheck again, which can make day-to-day budgeting easier. On top of that, it removes the stress of trying to guess the “right” moment to take money out, reducing the temptation to make timing mistakes that could hurt long-term returns.

The Cost Nobody Talks About: Transaction Fees

Here’s where things get tricky. Many employer-sponsored retirement plans, particularly 401(k)s, charge a fee each time you take a distribution.

Example:

Imagine a retiree withdrawing $600 every month from their 401(k). If each transaction comes with a $100 fee, that’s 17% gone immediately before investment returns and before taxes.

Compare that with an IRA or brokerage account, where ACH transfers are often free. Suddenly, the “safe” strategy looks expensive.

When the Math Doesn’t Math

Let’s break it down further:

• $100 per withdrawal x 12 months = $1,200 in annual fees
• If your RMD is $7,200 for the year, that’s more than 16% lost to fees
• Over a decade, that’s $12,000 drained from your retirement income

Not only do these recurring fees reduce income, but they can also amplify the sequence of return risk — the danger of selling investments at the wrong time. Paying extra fees accelerates the erosion.

Better Withdrawal Strategies

The good news is that retirees have several ways to minimize or even eliminate transaction fees on their RMDs. One of the most effective approaches is rolling assets from an employer-sponsored plan into an IRA, since many custodians don’t charge for routine distributions. Another option is to rethink the frequency of withdrawals. Instead of taking money out every month and racking up charges, some retirees opt for quarterly or even a single annual distribution. This reduces the number of transactions while still meeting IRS requirements.

It’s also worth comparing custodians, because some providers offer no-fee transfers while others tack on steep charges for each withdrawal. Even if you’re happy with your current setup, reviewing the plan documents and fee schedule can uncover hidden costs you may not have realized you were paying. A little attention to these details can mean thousands of dollars saved over the course of retirement.

Questions Retirees (and Advisors) Should Be Asking

Before setting your RMD schedule, ask:

• Am I required to pay a fee every time I take a distribution?
• Would consolidating withdrawals save me money?
• Is my retirement account the best vehicle for my withdrawal strategy?

A few simple questions can prevent thousands of unnecessary costs.

Final Thoughts

Reverse dollar-cost averaging can be a smart way to manage retirement income, but only if the math works in your favor. Transaction fees are often overlooked, yet they can quietly eat away at your nest egg, turning a sound strategy into an expensive one.

Before settling on a withdrawal plan, retirees and advisors should carefully evaluate the real costs. Sometimes, the smartest move isn’t about timing the market; it’s about avoiding unnecessary fees.