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You may not think about required minimum distributions (RMDs) throughout your career, but chances are you will think about them once you reach your 70s.
The IRS requires that you begin taking annual withdrawals from traditional IRAs, 401(k)s and other deferred retirement accounts. When to take your first RMD depends on your age. Although RMDs currently begin at age 73, that will not always be the case. Under the SECURE 2.0 Act, the RMD age will increase to 75 years in 2033.
RMDs are a crucial part of retirement planning. A financial advisor can help you prepare for these mandatory withdrawals, which can have a significant impact on your taxes.
On the surface, the mechanics of RMDs are simple: the account holder withdraws a certain percentage of tax-deferred funds based on their account balance at the end of the previous year. That amount is divided by the account holder’s life expectancy factor – a number calculated by the IRS – to arrive at the RMD amount.
For example, the IRS life expectancy for a 74-year-old person is 25.5. If their IRA balance was $200,000 on December 31 of the previous year, their RMD amount would be $7,843.
That’s just simple math. When, on the other hand, you need to take your first RMD, it’s a little more complicated:
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Those born before July 1, 1949 were required to take their first RMD at age 70.5, meaning those people should already be receiving benefits.
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Those born between July 1, 1949 and 1950 were, and should have been, required to begin their RMD at age 72.
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Anyone born between 1951 and 1959 must obtain their first RMD by April 1 of the year after they turn 73.
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Anyone born in 1960 or later must obtain their first RMD by April 1 of the year after they turn 75.
As you can see, the IRS allows you to delay your first RMD until April 1 of the year after you are due to start taking distributions. For anyone born in 1951, their RMDs start this year, but they can wait until April 1, 2025 to make the actual withdrawal. After that, each annual withdrawal must be made before the end of the year, meaning anyone who delays their first RMD in 2024 will have to make a second withdrawal before the end of 2025.
Keep in mind that a financial advisor can help you create a comprehensive retirement plan that includes RMDs as part of it.
This raises the question of whether it is better to delay your first RMD. In some cases it may make sense. If your spouse is still working but plans to retire next year, delaying the first RMD means you may be in a lower tax bracket by April 1 of the following year.
The downside to delaying the first RMD is that taking two distributions in the same year could push you into a higher tax bracket. Two RMDs will also likely increase your combined income and potentially result in taxes on 85% of your Social Security benefits. Higher income can also increase your Medicare premiums, which are subject to an IRMAA (income-based monthly adjustment amount) surcharge.
However, if you are going to make a qualified charitable distribution (QCD) with your RMD, you will not pay taxes on the withdrawal. As a result, you can delay your first distribution and leave the money to generate additional profits until you donate it to charity. And if you end up needing your second RMD for income, you won’t have to deal with the tax impact of two RMDs in one year since your QCD would have been made tax-free.
Whatever your strategy for taking RMDs, it’s important to meet the deadlines. If you do not take an RMD, you will be assessed a 25% tax on the required amount not withdrawn. If that sounds harsh, remember that the penalty tax was 50% until the SECURE 2.0 Act was signed into law in 2022. A financial advisor can help you plan your RMDs so you can anticipate their tax impact.
The age at which you must start taking required minimum distributions has changed for many people, but you still have the option to delay taking your first RMD until April 1 of the year after you are required to take withdrawals. This could have positive or negative tax implications depending on your wider financial circumstances.
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If you’re not sure how much you should take out, SmartAsset has a special RMD calculator specifically designed to help you estimate how much your required distributions should be.
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A financial advisor can help you plan for RMDs and potentially limit their impact. Finding a financial advisor does not have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can have a free introductory meeting with your advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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The post When Should I Take My First RMD? first appeared on SmartReads by SmartAsset.
