When to Take Your First Required Minimum Distribution From an IRA
You may be able to postpone taking your first required distribution from an IRA until the following year, but that can trigger a bigger tax bill.
Q. I turned 70 this year, and I am wondering if I must take an RMD (Required Minimum Distribution) from my IRA this year or if I can wait until next year.
A. It depends on whether your birthday falls before or after July 1. It also depends on whether you want to use your option to delay taking your first withdrawal.
You generally have to start required minimum distributions from your traditional IRAs in the year you turn 70½. If you were born between January 1 and June 30, 1947, then you need to take your RMD by December 31, 2017 (but for your first RMD, you can wait until April 1, 2018).
The IRS Publication 590-B provides all the information Re: Distributions and the Taxable consequences. IRS Publication 590-B
Quoting from the Publication: Distributions by the required beginning date. You must receive at least a minimum amount for each year starting with the year you reach age 70½ (your 70½ year). If you do not (or did not) receive that minimum amount in your 70½ year, then you must receive distributions for your 70½ year by April 1 of the next year.
If an IRA owner dies after reaching age 70½, but before April 1 of the next year, no minimum distribution is required because death occurred before the required beginning date.
Even if you begin receiving distributions before you reach age 70½, you must begin calculating and receiving required minimum distributions by your required beginning date.
Distributions after the required beginning date. The required minimum distribution for any year after the year you turn Distributions after the required beginning date. The required minimum distribution for any year after the year you turn 701 2 must be made by December 31 of that later year.
Example. You reach age 70½ on August 20, 2017. For 2017, you must receive the required minimum distribution from your IRA by April 1, 2018. You must receive the required minimum distribution for 2018 by December 31, 2018.
If you do not receive your required minimum distribution for 2017 until 2018, both your 2017 and your 2018 distributions will be included in income on your 2018 return.
Distributions from individual retirement account. If you are the owner of a traditional IRA that is an individual retirement account, you or your trustee must figure the required minimum distribution for each year.
The IRS provides a Schedule for these amounts. Figure your required minimum distribution for each year by dividing the IRA account balance as of the close of business on December 31 of the preceding year by the applicable distribution period or life expectancy. Tables showing distribution periods and life expectancies are found in Appendix B of the Publication.
There are also issues pertaining to the age of your spouse, whether or not you inherited the IRA, if you die in the same year as the RMD, a change in Beneficiary, and additional issues. These are all explained in IRS Publication 590-B.
See the Kiplinger RMD Calculator for ease of use in figuring the amount required for each year:
[The same timing applies to RMDs from 401(k)s, although you can delay taking RMDs from your current employer’s 401(k) if you’re still working at age 70½, unless you own 5% or more of the company.]
People who were born in 1947 on July 1 or later don’t need to do anything yet. They will turn 70½ in 2018, so they’ll have to take an RMD by December 31, 2018 (but for their first one, they can delay until April 1, 2019).
The April 1 extension applies only to your first RMD after age 70½. You’ll need to take all subsequent RMDs by December 31 each year—including your second RMD.
So if you turned 70 in the first half of 2017, you can wait until April 1, 2018, to take the first withdrawal. But you’ll also need to take your second withdrawal—for age 71—by December 31, 2018. In other words, you will end up taking two RMDs in a single year.
When deciding the timing of your first RMD, consider the impact that taking two RMDs in one year could have on your finances. Roger Young, a senior financial planner with T. Rowe Price, says it’s generally better to take that first RMD by December 31 because taking two RMDs in one year could increase your taxable income and have other financial implications. Not only could it bump you into a higher tax bracket, but the extra income could also cause a larger portion of your Social Security income to be subject to taxes.
“You don’t want to be in a situation where you go from not having to pay tax on Social Security benefits or only having to pay taxes on 50% of your Social Security benefits to having to pay tax on 85% of your Social Security benefits,” says Young.
And if taking two RMDs in one year increases your adjusted gross income plus tax-exempt interest income to more than $85,000 if you’re single or $170,000 if you’re married filing jointly, then you’ll have to pay extra for Medicare Part B and Part D. “You definitely don’t want to be a handful of dollars above that threshold,” says Young.
It can be worthwhile to take advantage of the April 1 extension, however, if your taxable income is already higher this year than it will be next year. That can occur if you win the lottery (which happened to one of Young’s clients), or if you received a bonus or buyout from work or some other windfall.
One way to avoid boosting your adjusted gross income is to give your RMD from your IRA to charity. People who are 70½ or older can transfer up to $100,000 tax-free from their traditional IRA to charity each year, which counts as their RMD but isn’t included in their adjusted gross income. (This is not an option for 401(k) plans.) You have to wait until the day you turn 70½ or later to make this “qualified charitable distribution,” and you must do so by December 31 (you can’t wait until April 1 of the following year).
Remember: You can withdraw or use your traditional IRA assets at any time. However, a 10% additional tax generally applies if you withdraw or use IRA assets before you reach age 59½. This is explained under Age 59½ Rule under Early Distributions in IRS Publication 590-B. You generally can make a tax-free withdrawal of contributions if you do it before the due date for filing your tax return for the year in which you made them. This means that even if you are under age 59½, the 10% additional tax may not apply.
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As a reminder, this Blog Post is for informational purposes only and is not intended as legal or tax advice.