Should You Delay Your First IRA Payout?

For most folks, when you reach 70½, you must start taking money from your retirement accounts every year. A little flexibility exists in the first year for you to plan withdrawals to your tax advantage.

Once you are 70½, the Internal Revenue Service requires you to withdraw a certain amount from your 401(k), 403(b) or other qualified retirement plans, including individual retirement accounts. The IRS calculates this amount based on your account balance and life expectancy.

If you are still working, you don’t have to take these required minimum distributions, or RMDs, from your 401(k) plan. This applies only to your current plan – not your old 401(k) plans from former employers. If you own 5% or more of the employing company, you must also begin RMDs at 70½, whether you retire or not.

When you are first subject to a RMD, you have until April 1 of the following year to take it. For all the rest of the years, you must take your RMD by Dec. 31. It makes sense most of the time to take that first RMD by Dec. 31 of the year that you turn 70½, because otherwise you have two distributions hitting your tax return that year.

However, in some cases, it might work to your advantage to delay that first distribution until the following year – as long as you make it by April 1, you’re golden. (Failing to withdraw your RMD or taking less than you should creates a 50% tax penalty.)

If your income is much higher in the year you reach 70½ than it is the following year, you may want to make this delay. Another reason to postpone the first RMD is if it bumps you into a higher tax bracket, and you are already in the increased bracket the following year due to the second distribution that you have to take.

Keeping your income low in the first year also maximizes your tax return if you use itemized deductions. Some deductions must exceed a certain percentage of your adjusted gross income before you claim them. For example, for medical expenses, the threshold is 10%, and for miscellaneous deductions, 2%.

There is nothing that says you have to take the distribution in a single year. You can take a partial RMD in the year you reach 70½, up to your tax bracket limit, and then take the rest in the following year, as long as you take the full amount of the first year’s RMD by April 1.

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Written by Jim Blankenship, CFP, EA, and an independent, fee-only financial planner at Blankenship Financial Planning in New Berlin, Ill. He is the author of An IRA Owner’s Manual and A Social Security Owner’s Manual. His blog is Getting Your Financial Ducks in a Row, where he writes regularly about taxes, retirement savings and Social Security.

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