Think twice about delaying your first MRD

Delaying your first MRD until April 1 could push you into a higher tax bracket.

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Key takeaways

  • Delaying your first MRD could push you into a higher tax bracket
  • Your MRD amount depends on your age
  • Failure to take MRDs on time can result in substantial tax penalties

Have you celebrated your 70th birthday yet? If so, you have a new deadline fast approaching. Beginning when you turn 70½, IRS regulations generally require you to withdraw a minimum amount of money each year from your tax-deferred retirement accounts—like traditional IRAs and 401(k) plans—or pay a 50% penalty on any missed amounts. These required withdrawals are known as minimum required distributions (MRDs)—also referred to as required minimum distributions (RMDs).1

Typically, the MRD deadline is the last business day of the year. But if it's your first time taking an MRD, the IRS gives you a one-time, 3-month extension, to April 1 of the following year.

Think twice about delaying your MRD, however. It could boost the taxes you'll pay on the money you take out. For instance, by delaying your MRD until April 1, 2019, instead of Friday, December 31, 2018 (the last business day of 2018), you could potentially put yourself in a higher tax bracket in 2019, and it could affect the rates you pay for Medicare insurance.

How MRDs are taxed

When you take out your first MRD, all withdrawals of earnings and pretax contributions will be taxed as ordinary income. If you take out your first MRD in 2018, you will be taxed in 2018. But if you delay taking your 2018 distribution until 2019, you will end up with 2 MRDs in that year—your 2018 and 2019 MRDs—potentially pushing you into a higher tax bracket in 2019.

It could also affect the rate you pay for Medicare Part B. For example, if you make $85,000 or less per year, you would have to pay $134 per month in premiums for Part B. If you decided to delay your MRD until April 1 of 2019 and had to make 2 MRDs in 2019, the extra amount could lift you into the next level—people who make between $85,000 and $107,000 per year—in which case you would have to pay $187.50 per month for Part B.2

Consider a hypothetical retiree, who just turned 70½. Last December 31, he had $300,000 pretax in a single traditional IRA. As you can see in the illustration below, if he delays taking his first MRD until next April 1 (MRD #1), he could pay more in taxes because he will have a higher MRD than if he took his first MRD this year and the second next year (MRD #2). (Note: We assume no change in the market value of the IRA's investments for the entire period.)

The reason stems from the way the MRDs are calculated. The IRS formula is based on a combination of your age, your previous year's account balance, and your life expectancy. In this case, delaying the first MRD increases the account balance in the current year, which results in a higher MRD for the second year—and a higher 2-year tax bill.

The life expectancy used to compute the first-year MRD is 27.4 years. The life expectancy used to compute the second-year MRD is 26.5 years. That's why taking your first MRD in the year that you turn 70½ may reduce the amount of your second MRD, and potentially may reduce the tax you will pay.

Avoiding delay is not always the right strategy, and it is important for you to evaluate whether a delay may make sense for your particular situation. Keep in mind that your MRD is an important part of a long-term plan of withdrawals to fund your lifestyle in retirement.

The amount of your first MRD depends on when you take it
  Option 1:
Delay your first MRD
Option 2:
Don't delay your first MRD
MRD #1 $10,948.91 $10,948.91
MRD #2 $11,320.75 $10,907.59
Total $22,269.66 $21,856.50
  Your calculation will be based on the previous year-end balance, which includes the undistributed first-year MRD amount. The calculation is based on $300,000 in a traditional IRA and uses the IRS Uniform Lifetime Table. Your second MRD will be based on the previous year-end balance, which does not include your first MRD amount. Your second-year MRD would be based on a lower fair market value of $289,051.03, because your first-year MRD would have already been distributed. The calculation uses the IRS Uniform Lifetime Table.
Source: IRS Uniform Lifetime Table.

Deadline distinctions

There are a few special rules governing distributions to keep in mind. If you are over 70½ and still working, you can generally delay your MRDs from your 401(k)—but not your traditional IRAs—until you retire.3

If you have a spousal beneficiary for a 401(k) or IRA who is more than 10 years younger than you and is the sole beneficiary for the entire distribution year, you can base your MRD on your joint life expectancy.

For inherited IRAs, the rules are different for spouses and nonspouses.

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This information is intended to be educational and is not tailored to the investment needs of any specific investor.
1. Minimum required distribution rules do not apply to Roth accounts during the lifetime of the original owner, or to participants in workplace retirement plans who are less than 5% owners, until they retire. MRDs are also required from 403(b) and 457(b) plans, as well as from SEP IRAs, SARSEPs, and SIMPLE IRAs. Your withdrawals will be included in your taxable income except for any part that was previously taxed (your basis).
3. See note 1.
Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.
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