When is the most tax-efficient time to take my first RMD?
I will be 70 years old next July and will be doing my first required minimum distribution (RMD). I am confused about taking it in the year of reaching age 70.5 and paying tax on it in that calendar year. That would add to my regular tax burden when my other income is considered. Or should I take the RMD the following April, thereby delaying the tax due until the following year? When is the most tax-efficient time to take my first RMD?
If you will be 70 in July 2019, then you will turn 70.5 in January 2020. Therefore, you will need to take your first RMD for the year 2020, but have until April 2021 to do so. If you will have significantly lower income in 2021, compared to 2020, then it may be advantageous to wait until 2021 to take the first RMD. If you expect no significant difference in income in each of these years, then it would be best to take the initial RMD in 2020 because you will still need to take another RMD in 2021 for the year 2021. Two RMDs taken in 2021 may be more tax punitive if all other income is unchanged. All RMDs, after the first year, must be taken during the calendar year to which they apply.
There are a few things to consider... say you turn 70.5 in 2018 and you are still working and have significant income, but you retire and have significantly less income in 2019. It may make sense to push the first distribution to 2019 BUT you will need to take BOTH the 2018 distribution and the 2019 distribution in 2019. So two distributions instead of one.
Other tidbits to consider:
1) Will you still itemize under the new tax reform changes?
2) Are you charitable?
If 1 is a no and 2 is a yes then you have other planning opportunities available to you that have the potential to save you decent money.
I would advise to invest in a planner to go through these scenarios for you. I don’t always recommend this I would say the value potential greater in your case than others.
There are fee-only planners that have processes to help people through these scenarios without requiring asset management or product purchase.
I’m not saying it needs to be me but I’m always happy to help point people in the right direction.
Best wishes to you on your financial journey!
The answer has more to do with your other income. If you take the distribution this year it will be added to this year's income and your tax bracket will be based on that new combined income. However, if you wait you will be taking not only this years payment but the value also for next year. You will also see next years required distribution amount be larger by waiting because you did not remove the assets from this year. (RMDs are based on the account values Dec 31 of the previous year and your age in the year of withdrawing) All this being said if your income is scheduled to decrease next year waiting may make sense otherwise there are no tax benefits to waiting.
If your 70th birthday is July 2019 then you turn 70-1/2 in January 2020. You have to take your RMD by April 1, 2021. Usually it doesn't matter whether you take the RMD in 2020 or 2021, if you expect your other income to be roughly the same in each year. Remember that you will have to take a 2021 RMD also, so taking your 2020 and 2021 distributions in the same year might cause you to be in a higher bracket. That is, deferring the inevitable might not save you any money. Consult your CPA to be sure.
You raise some interesting points in this question so I'd like to point out a few ideas to you.
First, you mention your other income. My assumption is that this money is in an IRA currently, but if you have other income then you may have access to a 401(k) or other retirement plans. You may have other interests that pay you income where you could set up a Solo 401(k) and roll this money into that retirement plan. I mention this because it is possible to defer your RMD if you're still working. This could be figured out in a quick phone call if you're interested in learning more, but I don't want to go into too much detail if it doesn't even apply.
Second, if you give money to charity but will no longer be itemizing because of the new tax rules then you can do a qualified charitable contribution directly from your IRA. This distribution satisfies your RMD, but it doesn't count as income to you.
Please let me know if I can be of further assistance, good luck to you.
Matt Ahrens, CIMA®