After spending years building up your retirement savings, the time will eventually come when you need to start taking required minimum distributions, or RMDs, from your pretax retirement accounts. Financial experts point out that the first RMD can be particularly challenging to navigate.
As of 2023, most retirees must begin taking RMDs at age 73. If you’re in this situation, your first RMD deadline will be April 1 of the year after you turn 73, with subsequent withdrawals due by December 31 each year. This rule applies to tax-deferred individual retirement accounts, as well as most 401(k) and 403(b) plans.
“You want to be strategic and wise with how you handle the first distribution,” advises Jim Guarino, a certified financial planner and managing director at Baker Newman Noyes in Woburn, Massachusetts. Jim is also a certified public accountant.
When you withdraw from pretax retirement accounts, you’ll pay regular income taxes. This contrasts with the long-term capital gains taxes of 0%, 15%, or 20% you’d pay on profitable assets held for more than a year in a brokerage account.
### Two required withdrawals in one year
If you wait until April 1 of the year after you turn 73 to take your first RMD, you’ll still need to take your second RMD by December 31 of that same year. Consequently, this could lead to two RMDs in a single year, potentially elevating your adjusted gross income (AGI) significantly.
Senior financial advisor Abrin Berkemeyer from Goodman Financial in Houston warns that this increase in AGI can lead to unexpected tax ramifications.
For instance, a higher AGI can result in income-related monthly adjustment amounts, or IRMAA, for Medicare Part B and Part D premiums. In 2024, IRMAA begins when the modified adjusted gross income (MAGI) exceeds $103,000 for single filers or $206,000 for joint filers.
“That’s the most common surprise for retirees,” notes Berkemeyer.
Additionally, a higher AGI can mean higher taxes on Social Security benefits for lower-earning retirees or push their long-term capital gains bracket from 0% to 15%.
### When to defer your first distribution
If you’re retiring at 73 in 2024, experts suggest it might be wise to delay your first RMD until April 1 if you expect 2025 to be a lower-income year.
However, your RMD is calculated based on your pretax retirement account balance as of December 31 of the prior year, which means your 2025 RMD will depend on your year-end 2024 balance. The IRS determines this by dividing your prior year-end pretax balance by a life expectancy factor.
If your portfolio performed exceptionally well in 2024, your RMD for 2025 could be unexpectedly large, Guarino cautions.
“You really have to crunch the numbers,” he emphasizes, to decide whether it makes more sense to accept more income in 2024 or defer until 2025, taking into account account balances and tax forecasts.
