Key Points
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RMDs kick in at 73 or 75, depending on your year of birth.
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Make sure you understand the importance of taking RMDs on time.
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If you want to be charitable, there’s a way to make RMDs less costly from a tax perspective.
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If you have retirement savings in a traditional IRA or 401(k) plan, you’ll have to start taking required minimum distributions (RMDs) once you turn 73 or 75, depending on the year you were born. And those forced withdrawals could be a hassle if you aren’t prepared for them.
The good news is that that right strategies could help minimize the sting of RMDs and help you avoid penalties. Here are three key things to know about RMDs before they start.
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1. You can defer your first one, but that may not be smart
RMDs are due each year by Dec. 31. But you don’t have to take your initial RMD by that deadline. Rather, you’re allowed to defer your first RMD to April 1 of the year after you turn 73 or 75 without a penalty.
Doing so might seem like a smart move initially. But remember, if you push off your first RMD, you’ll then have to take two withdrawals from savings the following year. That could lead to a large tax bill and have other unwanted consequences.
A big uptick in income, for example, could result in surcharges on your Medicare premiums two years down the line. It could also cause your Social Security benefits to be taxed. So while you can defer your initial RMD, make sure to run the numbers before putting it off.
2. Correcting a missed RMD quickly could soften the blow
If you don’t take an RMD on time, you’ll generally face a 25% penalty on whatever sum you fail to remove from your account. For example, a missed $4,000 RMD means losing $1,000.
However, the IRS will typically make an exception if you correct your mistake within two years. In that case, you may only be looking at a 10% penalty.
Of course, it’s best to take every RMD on time and face no penalties at all. But life happens. Just know that the sooner you act following a missed RMD, the better the outcome might be financially.
3. QCDs could minimize the tax hit
The problem with RMDs is that they add to your taxable income. But they don’t automatically have to. If you’re inclined to be charitable with your savings, there’s a way to avoid taxes.
Qualified charitable distributions (QCDs) allow you to send money from an IRA to a registered charity directly. If you do a QCD, you won’t be taxed on your donation. At the same time, you can satisfy your RMD so that the money comes out of your IRA without a tax hit to you.
RMDs are an important thing to plan for. If you know they’re in your future, make sure you know the rules and familiarize yourself with strategies for making them easier to manage.
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