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Unlike most personal finance questions, the answer to this one is short and simple: Yes, waiting until April 1 to take your first RMD will affect the amount of your RMD for the second year.
The IRS rules on required minimum distributions – RMDs – require anyone who turns 73 in 2024 to withdraw a certain minimum amount from their IRAs and other deferred retirement accounts, and continue to do so each subsequent year. The penalty for blowing off an RMD is 25% of the unwithdrawn amount (but can be reduced to 10% if the error is corrected within two years).
The only benefit the IRS gives on RMDs is that you can choose to delay your first RMD until April 1 of the year after you turn 73. Deferrals may make sense for someone who has not done any tax or financial planning before facing their first RMD. , or for someone who has a large one-time increase in other taxable income the year he or she turns 73 and doesn’t want to pay a higher tax rate on RMD income, so you need to look at your situation holistically. financial circumstances.
A financial advisor can help you determine the best strategy for your RMDs. Get matched and talk to a fiduciary financial advisor for free.
But for most people it’s not a break; in fact, most financial planners caution against taking the option of delaying your first RMD. The reason for this is that if you delay your first RMD, you still have to take your second RMD – except that delaying RMD #1 means you have to take two RMDs in the next year. In many cases, these two benefits can push you into a higher tax bracket, increase taxes on your Social Security benefits, and possibly cause a surcharge on your Medicare coverage.
The formula for calculating RMDs also means that delaying your first RMD will likely make your second RMD larger than it would have been if you had not taken the option to delay.
Your RMD amount is calculated by taking the balance of your retirement accounts at the end of the previous year and dividing it by the IRS life expectancy table. At the age of 73 the factor is 26.5 years and at the age of 74 it is 25.5 years.
If you leave your first RMD in your account after December 31, the day your account balance determines your RMD, this means that the amount you would have withdrawn in your first year will also be included in the balance of your second RMD – along with any profits that generated money. Additionally, your second RMD is also divided by a shorter life expectancy, making that amount larger even if the account balance has not grown.
In some cases it may make sense to delay your first RMD. Talk to a financial advisor to determine the best course of action in your circumstances.
Here’s an estimate of what the first two RMDs could look like with no deferrals and a 7% gain on investments in the second year:
IRA balance as of December 31, 2023: $1 million
First RMD at age 73: $37,736
IRA balance as of December 31, 2024: $1.03 million
Second RMD: $40,481
Total RMDs over two years: $78,217
If the first RMD is deferred for a year with a 7% gain on investments, total RMDs for the first two years increase by about 3.4%:
IRA balance as of December 31, 2023: $1 million
First RMD at age 73: $0 – deferred
IRA balance as of December 31, 2024: $1.1 million
Deferred RMD: $37,736
Second RMD: $43,137
Total RMDs: $80,873
Increase: $2,656 (3.4%)
An example where a deferred first RMD might make sense is if you don’t need the money for living expenses and want to make an immediate qualified charitable distribution by sending the RMD money to charity, resulting in no taxes on the RMD money . In this case, if you let the balance grow for a year, the amount of your charitable contribution will increase and you will only pay taxes on the second-year RMD income.
A financial advisor can help you with your own RMD calculations and strategy. Make a match with a financial advisor today.
Delaying your first-year RMD is an option that may be useful in limited situations, but is not the best strategy for most retirees. RMDs should be considered and planned for in your overall retirement plan and an RMD strategy should be in place at least one year before the date of your first RMD.
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