Conventional wisdom says seniors should wait until the end of December to take their required minimum distribution (RMD)—that’s the minimum amount that tax law requires most people age 73 or older to withdraw annually from their traditional IRAs and employer-sponsored retirement accounts.
Delaying the RMD to year-end allows your retirement assets to continue to grow and gives you more flexibility in managing your tax situation. You are allowed to take your RMD anytime during the year, but in some cases, waiting is a disadvantage, triggering costly mistakes and penalties, explains our Bottom Line tax expert Ed Slott, CPA.
Situations in which taking your RMD sooner may be better than later…
You are doing a rollover. Say you are retired and want to move money in a 401(k) account to an IRA. According to the IRS’s “First Money Out” rule, whenever you take a distribution from an employee-sponsored retirement plan or an IRA, the first portion of that withdrawal is considered your RMD for the year. The rule also says that your RMD cannot be rolled over. You must take the RMD prior to the rollover.
You are doing a Roth IRA conversion, which allows you to convert all or part of your existing traditional IRA funds to a Roth, regardless of income level. You must pay income taxes on any converted funds in the year of the conversion. The First Money Out rule applies here as well—you must take the RMD before doing the conversion. Otherwise, you are likely to get hit with an excess contribution penalty since the IRS doesn’t allow you to convert (or roll over) RMD money.
You want to avoid last-minute delays and errors. Most RMD actions must be completed by December 31 each year. But because IRA custodians often are inundated by year-end demands and paperwork, they may not get to your request in time. It’s your responsibility if a transaction isn’t completed properly and on time. This is especially important if you want to satisfy your RMD and avoid federal taxes on the distribution by making a donation to a charity through a qualified charitable distribution (QCD). That process can take several weeks or longer to coordinate.
Note: If an RMD deadline is missed, you’ll owe the IRS a 25% excise tax on the shortfall, plus the income taxes due on the withdrawal. The penalty may be reduced to 10% or waived entirely if you can show that the shortfall was due to a reasonable error and that you have taken steps to remedy it.
For guidance on RMDs and actuarial tables calculating how much you owe, consult your accountant or go to IRS.gov, and search for “Retirement Plan and IRA Required Minimum Distributions FAQs.”
