According to IRS guidelines, when calculating Required Minimum Distributions (RMDs) for each of your accounts, you should divide the balance from the previous December 31 by a “life expectancy factor.” While some financial institutions may do the RMD calculations for you, ensuring the correct amount is withdrawn is ultimately your responsibility.
If you miss an RMD or withdraw too little, a hefty 25% penalty awaits, as Scott Bishop, a certified financial planner and partner at Presidio Wealth Partners in Houston, points out. However, if you spot the error and make the appropriate withdrawal within two years, and you submit Form 5329, the IRS might reduce the penalty to 10%.
Bishop advises, “If you miss the RMD, take responsibility and act promptly.” The IRS may even completely waive the penalty if you can demonstrate that the error was due to a “reasonable error” and that you are making “reasonable steps” to correct it.
Now, when it comes to your first RMD, timing can be crucial. Although retirees have until April 1 of the year after turning 73 to take their first RMD, many financial advisors advocate for withdrawing by December 31 of the prior year instead.
George Gagliardi, a certified financial planner and the founder of Coromandel Wealth Management in Lexington, Massachusetts, advises, “I almost always recommend taking it in the first year.” If you wait until April 1 for your first RMD, you’ll still need to take the second one by December 31 of the same year, which could lead to facing two taxable withdrawals in one year due to pre-tax withdrawal rules, significantly impacting your income taxes.
Increasing your adjusted gross income could lead to various tax implications, such as increased premiums for Medicare Part B and D. However, in some cases, deferring your initial RMD until April 1 might be beneficial, Gagliardi notes.
For instance, the year you turn 73 might come with unexpectedly higher income from capital gains or other one-time financial events, which wouldn’t recur in subsequent years. Therefore, waiting until April 1 might help you better manage your taxable income timing.
