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Should You Take or Postpone Your First RMD?

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Photo credit: jb

In the first year that you’re required to start taking Required Minimum Distributions (RMDs) from your IRAs and other retirement plans, you have a decision to make:  Should you take the RMD during the first year, or should you delay it to the following year?

The Rule

This decision comes about because of the special rule regarding your first RMD:  In the year that you achieve age 72 (used to be 70½), you don’t have to take the first distribution until April 1 of the following year. For each subsequent year thereafter, you’re required to take your RMD by December 31 of the year… so this first year provides you with the opportunity to plan your income just a bit.

Generally it’s a better idea to take the distribution in the first year, with just a few reasons that you might reconsider:

  • If your income is considerably higher in the first year than it will be in the following year, you might want to delay the distribution, recognizing the income the following year when your tax bracket is lower. This situation might come about if you’ve delayed retirement until age 72, so you’d potentially have much more income in that year than the following year.
  • If taking the distribution would have an adverse impact on your Social Security, causing a higher amount to be taxed in the first year (versus the second year), you might want to delay the distribution. Again, this might be due to retiring during the year you reach age 72 making your income higher during that year.
  • Other MAGI limited provisions may impact your decision as well – but these are too varied and specific to the individual to list here.

Reasons to NOT Delay

The downsides to delaying receipt of the first year’s RMD: delaying the distribution to the following year will cause a double-shot of RMD to be recognized as income in the second year. In addition, the two RMDs in one year will be unnecessarily complicated: Each has a different deadline (April 1 for the delayed RMD, December 31 for the regular RMD); each is calculated on different account balances (the delayed one is based upon the balance of December 31 of the year before you turned age 72, the regular RMD is based upon the balance one year later); and each is calculated based upon your Table I value for different ages (the first is based on age 72, the second on age 73).

All of these differences increase complexity which increases the possibility of confusion and opportunity for making an error, so unless you have a very compelling reason (such as those listed above) it’s probably in your best interest to go ahead and take the first distribution in the first year – when you reach age 72.

Note:  Bear in mind that this planning doesn’t apply to inherited IRAs and the RMDs – only to your own regular distributions from your own IRA. 

In addition, if you have a 401(k), 403(b) or other employer-oriented retirement plan instead of an IRA, your first year for distribution might be later than age 72. This occurs if you were still working for the company and are not a 5% or more owner of the company. This only applies to current employers’ 401(k) plans – if you’ve left a company your 401(k) plan will follow the age 72 start rules.

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