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Unlike most personal finance questions, the answer to this one is short and simple: yes, waiting until April 1st to take your first RMD will affect the amount of your second year’s RMD.
The IRS rules on required minimum distributions – RMDs – demand that anyone turning 73 in 2024 withdraw a certain minimum amount from their IRAs and other tax-deferred retirement accounts, and continue doing so in every subsequent year. The penalty for blowing off an RMD is 25% of the amount not withdrawn (but may be reduced to 10% if the error is corrected within two years).
The one break the IRS gives on RMDs is that you can elect to postpone your first RMD to April 1 of the year after you turn 73. Postponing can make sense for someone who hasn’t done any tax or financial planning before facing their first RMD, or for someone who has a big one-time increase in other taxable income in the year they turn 73 and don’t want to pay a higher tax rate on the RMD income, so you’ll need to take a holistic look at your financial circumstances.
But, for most people, it’s not a break – in fact, most financial planners warn against taking the option to delay your first RMD. The reason is that if you do postpone your first RMD, you still have to take your second RMD – except that postponing RMD No. 1 means you’ll be taking two RMDs in the next year. In many cases, those two distributions can push you into a higher tax bracket, increase taxes on your Social Security benefits, and possibly trigger a surcharge on your Medicare coverage.
The formula for calculating RMDs also means that postponing your first RMD is likely to make your second RMD bigger than it would have been if you hadn’t 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 age 73, the factor is 26.5 years, and at age 74 it’s 25.5 years.
Leaving your first RMD in your account beyond December 31, the day on which your account balance determines your RMD, means the amount you would have withdrawn in your first year also will be included in the balance for your second RMD – along with any gains that money generated. Plus, your second RMD also is divided by a shorter life expectancy, making that amount bigger, even if the account balance hasn’t 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 might look like with no postponement and a 7% gain on investments in the second year:
IRA balance on Dec. 31, 2023: $1 million
First RMD at age 73: $37,736
IRA balance on Dec. 31, 2024: $1.03 million
Second RMD: $40,481
Total RMDs over two years: $78,217
If the first RMD is postponed a year with a 7% gain on investments, the total RMDs for the first two years increases by roughly 3.4%:
IRA balance on Dec. 31, 2023: $1 million
First RMD at age 73: $0 – postponed
IRA balance on Dec. 31, 2024: $1.1 million
Postponed RMD: $37,736
Second RMD: $43,137
Total RMDs: $80,873
Increase: $2,656 (3.4%)
One instance where a postponed first RMD can make sense is if you don’t need the money for living expenses and want to make a direct qualified charitable distribution by directing the RMD money to a charity, which results in no tax on the RMD money. In this case, allowing the balance to grow for a year increases the amount of your charitable contribution and you pay tax only on the second-year RMD income.
Delaying your first-year RMD is an option that may be helpful in limited situations but isn’t the best strategy for most retirees. RMDs need to 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.
Balancing taxes and retirement income – and figuring out how to minimize taxes in retirement – is a crucial issue. A knowledgeable financial advisor can help you decide how to structure and coordinate these payments over the span of your retirement.
Make sure your emergency fund isn’t losing out to inflation. It’s best to keep your liquid assets in a high-yield savings account.
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Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
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