Your First RMD Doesn't Have to Be a Tax Nightmare. Here's a Smarter Way to Take It.
Key Points
Required minimum distributions (RMDs) can create a tax headache.
The timing of your first RMD could make your tax bill better or worse.
It's important to take that first withdrawal strategically.
If you have your nest egg sitting in a traditional IRA or 401(k), turning 73 may come with a financial milestone many retirees would rather avoid -- your first required minimum distribution (RMD). Not only do RMDs force you to take money out of your savings, but they can easily result in a large IRS bill, depending on their size.
The good news is that you get flexibility with your first RMD. The bad news is that taking advantage of that flexibility could actually create a tax headache for you.
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Why the timing of your first RMD is crucial
RMDs are due by Dec. 31 each year. But there's an exception for your first one.
You're allowed to defer your initial RMD until April 1 of the year after you turn 73. And at first, that might seem like it's worth doing, since it allows your money to grow on a tax-deferred basis a bit longer.
But there's a huge catch. If you delay your first RMD to the following April, you'll also need to take your second RMD by Dec. 31 of that same year. That means you're looking at two taxable withdrawals in one calendar year, which could push you into a higher tax bracket.
Not only that, but if your income rises significantly because of those two RMDs, it could lead to other consequences. You might have to pay taxes on your Social Security benefits, for one thing. And if your RMDs are substantial, your income could get bumped high enough that you're liable for surcharges on your Medicare Part B premiums.
A smarter way to take your first RMD
Rather than assume that delaying your first RMD is your best bet, you may want to consider taking it the year you turn 73. That could help you avoid a tax whammy the year after, not to mention less obvious consequences like taxed Social Security and costlier Medicare premiums.
Of course, if you don't like the idea of having to take RMDs, you could try doing Roth conversions before you have to start taking those mandatory withdrawals. But Roth conversions, too, require strategic timing.
Doing too large a conversion in a single year could have the same consequences as having to take two RMDs -- a massive tax bill, taxes on Social Security, and Medicare surcharges.
RMDs are something you need to manage carefully in retirement if you're subject to them. And that starts with the timing of your first one. Even though you may be tempted to delay that initial RMD, taking it the year you turn 73 could be a better idea from a tax perspective.
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