The Required Beginning Date is the day by which an individual is required to take their first Required Minimum Distribution (RMD) from retirement plans such as IRAs, 401(k) plans, and 403(b) plans.

The year of your required beginning date is determined by the year that you were born. Currently, as of the SECURE 2.0 Act, your first RMD is calculated based on the year of your 73rd or 75th birthday, depending on your birth year. Regardless, your required beginning date is then April 1 of the next year.

As a result, your first required minimum distribution has a built in extension. For every other RMD year, you need to take your RMD by December 31 of the same calendar year.

Choosing to delay your first RMD to the subsequent year means that you will be required to take two year’s worth of RMDs in the same calendar year. We typically advise against stacking RMDs in this way, because a systematic Roth conversion strategy is normally worth more and you need to take out your RMD for the year before you can convert. However, there are some tax planning opportunities where delaying your first RMD may be advantageous.

Within employer-sponsored retirement plans, there are special provisions for employees (not owners) who continue to work beyond their typical required beginagining date. Those workers are able to delay their first RMD until they are retired.

The IRS Website states:

Required beginning date for your first RMD

• IRAs (including SEPs and SIMPLE IRAs)
  • April 1 of the year following the calendar year in which you reach age 72 (73 if you reach age 72 after Dec. 31, 2022).
• 401(k), profit-sharing, 403(b), or other defined contribution plan
  Generally, April 1 following the later of the calendar year in which you:
  • reach age 72 (73 if you reach age 72 after Dec. 31, 2022), or
  • retire (if your plan allows this).

See the chart comparing IRA and defined contribution plan RMDs.

This means that those who retire after their 73rd birthday (or 75th birthday if they are born in 1959 or later) don’t have to take an RMD until April 1 of the year after their retirement and can choose to take two RMDs that year.

Because the year of retirement frequently has final salary payouts, there are some situations where shifting of income from the year of retirement to the year after can allow for effective tax planning.

If you have a substantial amount of income during your final year of employment, delaying your first RMD to the following year could move the RMD into a lower marginal tax rate or could lower your overall adjusted gross income (AGI) below other relevant tax thresholds.

Furthermore, while you would not be able to convert from your employer sponsored plan until you take that plan’s RMD, you would be able to take the RMD from a Traditional IRA and then convert from that traditional IRA while delaying your employer plan’s RMD. In this way, by delaying your employer-sponsored RMD you may create room for a large Roth conversion from your Traditional IRA.

Doing a large Roth conversion in your final year of employment is especially advantageous for retirees enrolling in Medicare, as retirement is a life-changing event which permits an IRMAA recalculation. An IRMAA life-changing event allows you to “reset” your income for the purpose of Medicare surcharge premiums. In this way, making large Roth conversions in your final year of working can be advantageous as those conversions are effectively ignored during IRMAA determinations.

If you choose to delay your first RMD, it is important not to forget to take two in the following year. Failure to take an RMD results in a steep tax penalty of 25%, although this penalty was reduced from it’s formerly exorbitant rate of 50% as part of the Secure Act 2.0.

Photo by Zdeněk Macháček on Unsplash. Image has been cropped.