If you aren't close to retiring yet, maxing out your contributions to IRAs, 401(k)s, and other retirement accounts can be a great way to reduce your taxable income. But if those are traditional accounts -- not Roth accounts that are funded with after-tax cash -- then you'll need to start withdrawing required minimum distributions (RMDs) at age 73.
RMDs are calculated by dividing the balance of your retirement account by your IRS life expectancy number (which is roughly 100 minus your current age). If you forget to take your RMD, the IRS will impose a 25% penalty on your expected withdrawal each year.
However, a special April 1 RMD deadline for first-year retirees can allow you to delay your first RMD. Let's see why that rule matters for retirees who want to spread out their taxes.
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What is the April 1 RMD deadline?
Retirees must withdraw their RMDs by Dec. 31 of each calendar year. But in the first year, you can delay your first RMD to April 1 of the year after you turn 73. However, you still need to pay the second RMD at the end of the year -- so you'll be paying two RMDs in your first year. If you don't want to do that, you should take your first RMD in the prior year after you turn 73.
For most retirees, taking two RMDs in the first year is a bad idea because it can bump you into a higher tax bracket, increase your taxes on Social Security, and trigger higher Medicare premiums. However, delaying your first RMD still makes sense in certain situations.
If you expect your income to be significantly lower in the year after you turn 73, then it might be smarter to take both RMDs in the year you turn 74. Let's take an individual who was still working at age 73 but fully retired by age 74. That person might also sell stocks or real estate to raise more cash for their retirement. In this case, they'll likely earn more income in the first year than in the second. Taking the RMD in the first year could push that person into a higher tax bracket, so it would be more tax-efficient to take both RMDs in the second, lower-income year.
Delaying your RMD could also be the right move if you plan to take large deductions (including charitable donations and medical expenses) or realize investment-related losses in the year you turn 74. You can also make a qualified charitable distribution (QCD) of up to $100,000 per year directly from your IRA to a charitable organization without it being counted as taxable income. Those donations could easily offset the taxes from doubling your RMDs in the first year.
Some other things to remember about RMDs
In addition to the April 1 deadline, first-year retirees should keep track of a few other big changes to RMDs introduced by the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act in 2022 and implemented over the past few years.
Starting in 2024, employees who are still working at age 73 and don't own more than 5% of the company sponsoring the plan don't have to withdraw RMDs from their 401(k)s until they retire. In 2033, the RMD starting age will be raised from 73 to 75. The SECURE 2.0 Act also clarified the IRS language for inherited RMDs, so a spouse inheritor can now wait to start withdrawing an inherited account's RMDs when they turn 73 instead of following the original owner's age.
RMDs can be confusing, but keeping up with these rules can make things go much smoother. It's all about adjusting your income so you don't pay too many taxes on your own savings.
