Required minimum distributions, or RMDs, are one of those retirement rules many savers learn to tolerate. Once you turn 73 or 75, depending on your year of birth, you'll have to start taking withdrawals from a traditional retirement account like an IRA or 401(k).
You could decide to blow off your RMDs. But doing so generally means facing a 25% penalty on the money you fail to remove, which is clearly not ideal.
Image source: Getty Images.
Now, to help savers ease into RMDs, the IRS allows you a bit of leeway on your first one. Normally, RMDs are due by Dec. 31 each year. But for your initial RMD, you get the option to defer until April 1 of the year following the year you turn 73 or 75.
At first, that might seem like a useful option. But in practice, it could backfire and result in a costly tax mistake.
The problem with taking two RMDs in one year
Delaying your first RMD helps you avoid a tax bill a bit longer. But it could also lead to a very large tax bill the following year.
If you push off your first RMD to April 1, you'll have two RMDs to take that same year. That could bump you into a much higher tax bracket than you're used to, depending on the size of your RMDs.
Also, RMDs are treated as ordinary income. And because of this, two withdrawals in one year could have consequences aside from a higher tax bracket and IRS bill.
You could end up being taxed on your Social Security benefits if your income rises enough. You could also end up having to pay more for Medicare.
The timing really does matter
You may be tempted to defer your first RMD. But doing so could create a tax nightmare that makes that RMD more painful than it needs to be.
If you're looking at a large boost in income the year you have to start taking RMDs (say, because you took a lot of capital gains in taxable accounts), then deferring could make sense. But you'll need to look at your complete financial picture to make that determination. You may want to consult a financial advisor or accountant, too.
While deferring that initial withdrawal may be a smart move for some people, it's crucial to understand the consequences of having to take two RMDs in the same year before making your decision. You may come to the conclusion that spreading those withdrawals out is the better and less painful choice.
