I’ve written a previous article on Required Minimum Distributions (RMD) in terms of what they are and how to calculate them.
In this article I want to talk about the one-time exception to the first year RMD.
The IRS allows individuals to postpone their first year RMD to the April 15 tax deadline of the year following the year they turn 70 1/2. This extension applies only to the first year. (As a reminder, any other years that you do not take your RMD by the end of the calendar year, the amount that you should have taken has a 50% income tax penalty).
Why might someone want to utilize the first year exception for delaying the RMD?
The most likely scenario is an individual who expects a low income year in the year that they take the delayed RMD. The most common example is someone (or their spouse) who is retiring in the year they would normally take their first RMD.
By delaying the first RMD to the following year, and taking both the first year RMD and the second year RMD in the same year, an individual may be able to pay significantly less taxes on these combined RMD’s if their income in this subsequent year is significantly less than it would be in the year of their original first year RMD.
For example, Mike and his wife Susan plan to retire at the end of 2020. Mike also needs to take his first year RMD in 2020, the year that they have a significant amount of work income. Because of the total amount of income that both Mike and Susan will make in the year 2020, they elect to defer Mike’s first year RMD until before April 15 of the year 2021. Since the year 2021 has a much lower income due to the fact that they will only have their Social Security benefits, they are able to take both 2020 RMD and 2021 RMD in the year 2021 and pay significantly less taxes on these distributions.
If you have any questions about this strategy as it relates to your particular situation, please consult your tax accountant.