A lot of people prefer to save for retirement in a traditional IRA or 401(k) because contributions to these accounts are made on a pre-tax basis. And during your peak earning years especially, that tax break can be nice.
But there's a big drawback to housing your savings in a traditional retirement plan, as opposed to a Roth account. Not only will your withdrawals during retirement be taxable, but you'll also be subject to required minimum distributions, or RMDs, once you turn 73 (or 75, depending on your year of birth).
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If you're turning 73 this year, it means it's time to prepare for your first RMD if you have a traditional retirement account. But you don't necessarily have to take that initial withdrawal this year.
The IRS gives people who are new to RMDs a bit of a grace period the first time around. And you're allowed to delay your initial RMD to April 1 of the year following the year of your 73rd birthday.
You may be inclined to push off your first RMD to delay the tax bill that comes with it. But doing so could be a mistake you sorely regret.
Two RMDs in the same year could be a huge problem
When you delay your first RMD to the following year, it means you end up having to take two mandatory distributions within the same calendar year. And that could have a number of unfavorable consequences both in the near term and down the line.
In the near term, you risk landing in a higher federal tax bracket and having a larger IRS bill to deal with. You also risk having to pay taxes on your Social Security benefits.
But that's not all. If taking two RMDs within the same year raises your income substantially, you could end up having to pay surcharges known as IRMAAs (income-related monthly adjustment amounts) on your Medicare premiums two years down the line. IRMAAs apply not only to Medicare Part B, but also Part D drug plans.
Think twice before delaying your first RMD
While it's nice to have the flexibility to delay your first RMD to the following tax year, don't assume off the bat that it's your best move. It could make sense to defer your first RMD if you already have a large income the year you turn 73 -- say, because you're still working, or because you enjoyed a lot of gains in a taxable brokerage account.
But unless you have a specific reason to delay your initial RMD, you may want to get it over with and take it the year you turn 73. Otherwise, you could end up causing yourself a financial headache.
