Saves tax in year one.
Costs more in year two.

The very first required distribution can be deferred into the following year. Almost nobody should do it, and the reason reaches further than the bracket.

The rule most clients get wrong in the first year

Required distributions begin the year a client reaches the qualifying age, but the very first one can be deferred to the first of April in the following year. Almost nobody should take that deferral.

Do it and two distributions land in the same tax year — the deferred one and that year's own. A client who postponed to save tax in one year frequently pays more across the two, and the effect reaches further than the bracket.

Why it reaches further

Doubling income in a single year raises the figure that sets Medicare premiums two years later, can change how much of Social Security is taxable, and can push a client over the threshold for the surtax on investment income.

Which accounts, and which balances

The calculation uses the prior 31 December balance across the client's traditional retirement accounts. Roth accounts belonging to the original owner are not subject to lifetime distributions.

The aggregation rule is where errors happen. Distributions from traditional IRAs may generally be taken from any one of them in total; employer plans are calculated and taken plan by plan. Firms that treat every account the same way eventually miss one.

The penalty, and the relief

Missing a distribution carries an excise tax, reduced from its historic level and reduced further if corrected promptly. There is a well-trodden process for requesting relief when a shortfall is corrected and the cause is reasonable. Nobody enjoys filing it, and it works.

The three that get missed

The year a client dies. Any distribution not yet taken for that year still has to come out.

Accounts held away. The old employer plan nobody has looked at since 2011 is the classic. If it is not on your statement, it is still the client's obligation and it will be your phone call.

The year a working client actually retires. A plan participant still working may be able to defer for that plan. The rule turns on the plan's terms and on ownership, and it does not apply to IRAs.

Where the planning is

Not in the arithmetic — every custodian computes it. It is in which asset is sold to fund it, whether the distribution should go to charity instead of to the client, and whether the years before distributions begin were used to convert.

The best work on required distributions is done in the decade before the first one.

Giving directly from the account →