What is it?
Over the years, you’ve accumulated funds in a traditional IRA or employer-sponsored retirement plan and those funds have been growing tax deferred. But tax deferral doesn’t last forever with a traditional IRA or a retirement plan. At some point, the government requires that income tax be paid on those funds, and that’s where required minimum distributions come into play. Unless an exception applies, income tax is due when distributions are made.
You know [because you’ve read about the required minimum distribution (RMD) rule] that you have to start taking minimum distributions from your IRA or employer plan no later than April 1 of the year after reaching age 73 (75 for those who reach age 73 after December 31, 2032). When you have to start taking distributions is known as the required beginning date (RBD). You have a choice of taking your first required distribution either (1) in the year you reach age 73 or (2) by April 1 of the following year. Although the general “rule” is to defer the payment of taxes whenever possible, deciding whether it’s better to take or defer that first required distribution requires some analysis.
Retirement plans may have a later distribution date
There is one situation in which your first required distribution can be taken later than described above. If you work past age 73 and are still participating in your employer’s retirement plan (and you do not own more than 5% of the company), you may delay your first distribution from that plan until April 1 following the year of your retirement. Note, however, that a plan is permitted to provide that the RBD for all employees is April 1 of the calendar year following the calendar year in which an employee reaches age 73.
Each year thereafter you have to also take a minimum distribution.
When must minimum distributions begin?
In 2019, the SECURE Act changed the RMD age from 70½ to 72. In 2022, the SECURE 2.0 Act changed the age again from 72 to 73, for those reaching age 72 after December 31, 2022. In 2033, the age will rise to 75 for those reaching age 73 after December 31, 2032.
Here’s an example to illustrate the timing of the first and second required distribution based on the age-73 requirement.
Say you reach age 73 in 2025. You can take your first distribution in 2025 (the year you’ll reach age 73) or delay it until April 1, 2026.
Note that your second distribution is required by December 31, 2026. Regardless of whether you took your first RMD in 2025 or delayed it until April 1, 2026, you will need to take your second by December 31, 2026.
Advantage and disadvantage of speeding up or delaying the first distribution
Maybe taking minimum distributions each year isn’t an issue because you’re already withdrawing more than the required minimum amount each year.
But what if you don’t need the money in your traditional IRA or retirement plan and you want to keep your funds growing tax deferred for as long as possible? In these cases, you might consider waiting until the last possible moment (April 1 of the year after you reach age 73 rather than in the year you reach age 73) to take your first minimum required distribution. But that could be a mistake for a couple of reasons.
This discussion pertains only to traditional IRAs and work-sponsored plans, not to Roth IRAs and work-sponsored Roth accounts. Roth accounts are not subject to the RMD rule while the original account owner is alive.
Why the starting date matters
A distribution from a traditional IRA or retirement plan is generally taxable income in the year made. If all contributions to your IRA were deductible contributions, the entire distribution must be included in your income. If nondeductible contributions were made to the IRA, only part of the distribution is included in your income. Similarly, if after-tax contributions were made to your retirement plan account, part of the distribution is not included in your income.
You reach age 73 in 2025 and take your first required distribution in December of that year. Your distribution is included in your income for 2025. If, instead, you take your first required distribution in March of 2026, your distribution is included in your income for 2026.
Your second RMD is due by the end of the year following the year in which you reach age 73. Unlike your first required distribution, you have no choice about the year in which you receive it. If you don’t take your first required distribution by the end of the year that you reach age 73, you will actually be taking two distributions during the following year. So what’s the big deal? Receiving two required distributions in the same year could push you into a higher tax bracket. Additionally, the extra income might affect the portion of your Social Security benefits that is considered taxable and could have a negative effect on deductions that are sensitive to adjusted gross income.