A Financial Planner Explains How One Mistake Could Make A Retiree Pay RMDs Twice In A Year

Required minimum distributions (RMDs) are a little known rule in retirement planning, but it's a tax rule retirees cannot afford to ignore. This is particularly true for individuals who built their retirement savings in 401(k), 403(b), 457(b), and Traditional IRAs. However, if you inherit a Roth IRA then you will have to take RMDs. RMDs typically begin when a retiree turns 73 and require that they withdraw a minimum amount from their tax deferred retirement account every year and pay taxes on those distributions. While many retirees may find that their normal withdrawals exceed their RMD amount, for some it may lead to faster drawdown of their accounts and a larger tax obligation. However, for retirees not on top of their accounts, it could result in them having to make two RMD withdrawals in one year, according to Kiplinger.

A double RMD year can only happen when a retiree first turns 73 and they choose to delay their first distribution until the April 1 deadline. This can occur because the IRS still requires that they take their second RMD by December 31 of that same year. By delaying their first RMD, both distributions are declared on a single tax return resulting not only in a double withdrawal but in doubling their taxable income. "If you don't take your RMDs at the appropriate time, you may face a hefty penalty," said Eric Heckman, a CFP writing for Kiplinger about the possible scenario.

Retirees can avoid a double RMD year simply with a bit of foresight. Although the deadline for retirees to take their first required minimum distributions is April 1 in the year after turning 73, individuals should take their distribution before that date. Retirees should preemptively take their first distribution by December 31 of the year they turn 73. For example, a retiree turning 73 in 2026 should take their first distribution by December 31, 2026, instead of waiting for April 1, 2027. "If you wait until the April 1 due date to make the first withdrawal and then make your second withdrawal by December 31, you'll pay taxes on two RMDs in the same year," said Eric Heckman in Kiplinger.

But even if you avoid a double RMD year, there are still ways to lower your tax obligations. One way to go about it is through Roth conversions. By moving your holding from a 401(k) or other RMD eligible account, individuals can lower their distribution amount. This can also work with Traditional IRAs and can be a powerful reason to convert an IRA to a Roth IRA. However, Roth conversions are most advantageous in the first few years of retirement. Another is to make qualified charitable distributions (QCD) from a traditional IRA, SIMPLE IRA, Inherited IRA, or SEP IRA. Individuals can donate up to $108,000, lowering their adjusted gross income and tax obligations.