Unlike most personal finance questions, the answer to this one is short and simple: Yes, if you wait until April 1 to take your first RMD, it will affect the amount of your RMD for the second year.
The IRS rules on required minimum distributions (RMDs) require that anyone who turns 73 in 2024 withdraw a certain minimum amount from their IRAs and other tax-advantaged retirement accounts and continue to do so each subsequent year. The penalty for missing an RMD is 25% of the amount not withdrawn (but can be reduced to 10% if the error is corrected within two years).
The only relief the IRS provides for RMDs is that you can delay your first RMD until April 1 of the year after your 73rd birthday. Delaying may make sense for someone who hasn’t done any tax or financial planning before their first RMD, or for someone whose other taxable income will increase significantly one time in the year of their 73rd birthday and who doesn’t want to pay a higher tax rate on RMD income. So you need to look at your financial situation holistically.
A financial advisor can help you find the best strategy for your RMDs. Get a free referral and talk to a financial advisor who’s right for you.
Delaying the first RMD is usually not a good move
For most people, however, that’s not a break — in fact, most financial planners caution against using the option to defer your first RMD. The reason for this is that if you defer your first RMD, you’ll still have to take your second RMD — except that deferring RMD #1 means you’ll take two RMDs next year. In many cases, those two distributions can push you into a higher tax bracket, increase taxes on your Social Security benefits, and potentially trigger a surcharge on your Medicare coverage.
The formula for calculating RMDs also means that by deferring your first RMD, your second RMD will likely be higher than if you had not chosen the deferral option.
Your RMD amount is calculated by dividing the balance of your retirement account at the end of the previous year by the IRS life expectancy table. At age 73, the factor is 26.5 years, and at age 74, the factor is 25.5 years.
Leaving your first RMD in your account past December 31, the date your account balance determines your RMD, means that the amount you would have withdrawn in the first year will also go into the balance of your second RMD – along with any gains that money generated. Plus, your second RMD will also be divided by a shorter life expectancy, making that amount larger 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 situation.
Example: Timely withdrawal of the first RMD
Here’s an estimate of what the first two RMDs might look like without a deferral and with a 7% investment gain in the second year:
IRA balances as of December 31, 2023: 1 million US dollars
First RMD at 73 years: 37,736 USD
IRA balance as of December 31, 2024: 1.03 million US dollars
Second RMD: 40,481 USD
Total RMDs over two years: 78,217 USD
Example: Postponement of the first RMD
If the first RMD is deferred for one year and investments show a 7% gain, the total RMDs for the first two years increase by about 3.4%:
IRA balances as of December 31, 2023: 1 million US dollars
First RMD at 73 years: $0 – moved
IRA balance as of December 31, 2024: 1.1 million US dollars
Deferred RMD: $37.736
Second RMD: 43,137 USD
Total RMDs: 80,873 USD
Increase: $2,656 (3.4%)
One case where deferring the first RMD may make sense is if you don’t need the money for living expenses and want to make a direct qualified charitable donation by forwarding the RMD money to a charity, which will result in the RMD money not being taxed. In this case, letting the balance grow for a year will increase the amount of your charitable donation, and you will only pay taxes on the second year’s RMD income.
A financial advisor can help you with your own RMD calculations and strategies. Get matched with a financial advisor today.
Bottom line
Delaying your RMD in the first year is an option that may be helpful in certain situations, but it is not the best strategy for most retirees. RMDs must be considered and planned for in your overall retirement planning, and an RMD strategy should be in place at least one year before the date of your first RMD.
Tips
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Balancing taxes and retirement income—and figuring out how to minimize taxes in retirement—is a crucial issue. An experienced financial advisor can help you structure and coordinate these payments during your retirement.
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Make sure your emergency fund doesn’t lose value due to inflation. It’s best to keep your liquid assets in a high-interest savings account.
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Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area. You can also schedule a free introductory meeting with the advisors you’re interested in to help you decide which one you think is right for you. If you’re ready to find an advisor who can help you reach your financial goals, get started now.
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Have an emergency fund ready in case unexpected expenses arise. An emergency fund should be liquid – in an account that is not exposed to the risk of large fluctuations like the stock market. The downside is that the value of liquid cash can be eroded by inflation. However, a high-yield account allows you to earn compound interest. Compare savings accounts from these banks.
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