I’m a Financial Planner: The RMD Timing Mistake Retirees Keep Making
Written by
Martin Dasko
Edited by
Molly Sullivan
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
Retirees can delay their initial required minimum distributions (RMDs) until April 1 of the following year after turning 73. However, this could be a huge mistake. While the IRS gives those who are new to RMDs this grace period, you’ll end up taking two mandatory distributions in the same year, which could lead to financial problems.
GOBankingRates consulted with financial planners and experts to learn about the mistakes retirees make with RMD timing and how to avoid potential issues.
The Cost of the RMD Timing Mistake
“While your first required minimum distribution can potentially be delayed until April 1 of the year following the year you turn 73 (or 75 if born 1960 or later), it’s considered an optimal approach to not push withdrawals to the eleventh hour,” said Daniel Gleich, a financial expert at Madison Trust Company. “Particularly, if an IRA or 401(k) account holder is not thoroughly familiarized with RMD regulations.”
Since a delayed RMD forces the account holder to take two RMDs in the same year, you can end up in a higher federal tax bracket, which could lead to you paying taxes on your Social Security benefits. If you’re using Medicare, this may also lead to an increase in premiums. The end result is higher taxes because you didn’t have a plan for your retirement income.
How To Avoid This RMD Timing Mistake
“One narrow Roth conversion window most retirees miss is the timeframe between retiring and collecting Social Security,” shared Joel Russo, owner and retirement advisor at NJ Retirement Planning. “Between when you retire and when you start collecting required minimum distributions (RMDs) at the age of 73 could be a smart window to do a Roth conversion.” Since your income is lower, your paychecks have stopped, your Social Security hasn’t been turned on, and you haven’t started collecting RMDs, this would likely lower your tax liability from the Roth conversion.
Christine Mueller Coley, a CFP and wealth advisor at SteelPeak Wealth, advised that a common method to avoid larger RMDs is for retirees to do Roth conversions prior to RMD age in order to lower traditional IRA balances. “I would encourage people to focus on making Roth conversions earlier in life, even while working and participating in Roth IRAs and 401k plans,” she noted.
Gleich emphasized that one of the most effective ways to avoid penalties and timing mistakes is drafting a retirement blueprint. “Preparation makes it generally easier to anticipate the impact of taxes and can leave room for investors to implement strategies such as Roth conversions. It’s typically encouraged that this planning is done well before approaching the mandated RMD age of 73,” he said.
The experts agreed that you want to work with a tax professional to review a cost-benefit analysis of a Roth conversion and the impact of RMD timing to ensure that you’re prepared for life in retirement.
More From GOBankingRates
