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Using First Year RMD Delay to Your Advantage

Photo courtesy of Alicja Colon on unsplash.com.

Photo courtesy of Alicja Colon on unsplash.com.

When you are first subject to RMD (Required Minimum Distributions), which for most folks* is the year that you reach age 70½, you are allowed until April 1 of the following year to receive that first minimum distribution.  For all other years you must take your RMD by December 31 of that year.  For many folks, it makes the most sense to take that first year RMD during the first tax year (by December 31 of the year that you’re age 70½), because otherwise you’ll have two RMDs hitting your tax return in that year.  However, in some cases, it might work to your advantage to delay that first distribution until at least the beginning of the following year – as long as you make it by April 1, you’re golden.

There may be many circumstances that could make this delay work to your advantage – maybe you’re still working in the year you reach age 70½ and your income is much higher than it will be the following year, for example. 

Another example is if your income in the year you reach age 70½ is lower and when the RMDs are added the resulting taxable income bumps you into a higher tax bracket.  The following year you might already be in the increased bracket already due to the distribution that you know you’ll have to take, so it might be to your advantage to take a partial RMD in the year you reached age 70½, up to the bracket limit, and then take the rest in the following year.  As long as you’ve taken the full amount of the first year’s RMD by April 1 of the year after you reach age 70½, there is nothing that says you have to take the distribution in a single year.

Keeping your income low in the first year can impact many different items on your tax return – itemized deductions with floors (like medical expenses at 10% or miscellaneous deductions at 2%), Social Security taxability, and other items.

*For people with 401(k), 403(b) and other qualified retirement plans that are not IRAs, the age is still 70½ to begin RMDs unless you’re still employed by the sponsoring employer.  Also, even if you are still employed, if you are a 5% or greater owner of the employing company, you must also begin RMDs at age 70½.  If you are not a 5% or greater owner of the company, your RMD year for that account is the later of the year that you retire or the year that you reach age 70½.  This applies ONLY to the account at that employer – not for IRAs or old 401(k) plans from other former employers.  However, amounts that you “roll in” to the current employer’s 401(k) plan from any source can be treated in this delayed fashion as well.

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