RMD Planning: What to Watch Before Your First Withdrawal

For many pre-retirees and retirees, Required Minimum Distributions (RMDs) mark a real turning point in how they use their retirement savings. An RMD is the minimum amount the IRS requires you to withdraw each year from certain tax-deferred retirement accounts once you reach a specified age, shifting control over when withdrawals happen from you to the requirements in the tax code. 

After decades of deciding how much to save and whether you have saved enough, this change naturally raises questions about taxes, cash flow, and timing, especially before your first withdrawal is required.

If you’re approaching RMD age or are already there, understanding how these rules apply to your accounts can help reduce surprises and avoid common administrative mistakes. 

At SGL Financial, our team of financial professionals will answer RMD-related questions we frequently receive and provide explanations and examples to help you think through what matters most before you take that first distribution.

Read our latest quick guide: What Retirement Planning Details Do People Often Overlook?

What Is an RMD, and Why Does It Matter?

As noted above, an RMD is the minimum amount the IRS requires you to withdraw each year from certain tax-deferred retirement accounts once you have reached a certain age.

Think of RMDs like a lease requirement on a property you own. You still control the asset, but you’re now required to use—or in this case, withdraw—a minimum amount each year.

The IRS allowed tax deferral for decades; RMDs are how it begins collecting taxes on those deferred dollars. RMDs matter because:

• Withdrawals are generally taxable as ordinary income
• They can affect marginal tax brackets
• They may influence Medicare premiums and other income-based thresholds
• Missed or incorrect RMDs can result in penalties

Listen to our podcast episode, “How to Think About Your Money in 2026.”

Which Retirement Account Types Are Subject to RMDs?

Not all retirement accounts play by the same rules. One of the first planning steps is identifying which accounts actually trigger RMDs.

Accounts that generally require RMDs include:

• Traditional IRAs
• Rollover IRAs
• SEP IRAs
• SIMPLE IRAs
• Most employer-sponsored plans such as 401(k)s, 403(b)s, and 457(b)s
  

Accounts that do not require RMDs during your lifetime:

• Roth IRAs (for the original owner)
• Roth 401(k) and 403(b) (Designated Roth Accounts): As of 2024, these are exempt from RMDs during the owner’s lifetime.
• Qualified Longevity Annuity Contracts (QLACs): Funds invested in a QLAC (up to $215,000 in 2026) are removed from RMD calculations.
  

An easy analogy: think of retirement accounts like different tax buckets. Some buckets are filled with pre-tax dollars and come with future tax obligations. Others are filled after tax and are not impacted by the same withdrawal rules.

When Do RMDs Start?

Current law sets the RMD age at 73 for most retirees today. Future legislation may change this for younger investors, which is why ongoing review matters.

Your first RMD year is the calendar year in which you reach RMD age. However, the IRS allows flexibility for that first withdrawal, which leads to one of the most common planning questions.

Do I Have to Take My First RMD Right Away?

Not necessarily. When you reach RMD age, you have two timing options for your first required withdrawal:

• Take your first RMD by December 31 of the year you reach RMD age, or
• Delay your first RMD until April 1 of the following year
  

At first glance, delaying a few months may sound appealing as you have more time before your retirement date. But this decision can affect how much income shows up on your tax return in a single year.

A helpful way to think about this choice is like deciding when to accept a large bonus. You can take it this year and spread income over two tax years, or delay it and potentially stack income into one year. The total dollars may be the same, but when they show up can change the tax outcome.

How Can Delaying Your First RMD Affect Taxes?

Here’s a simplified hypothetical example to illustrate the impact. Let’s assume:

• You are single.
• Social Security benefits: $20,000.
• First RMD: $45,000; Second RMD (next year): $46,000.
• Because income is well above IRS thresholds, assume 85% of Social Security is taxable in both scenarios (that is, $17,000 of the $20,000). The “up to 85%” rule and thresholds come from IRS/SSA guidance.
  • Why 85% here? For a single filer, once “combined (provisional) income”* exceeds $34,000, up to 85% of Social Security benefits can be taxable. With $65,000 in non‑SS income—even before RMDs—you’re already above that level. 

*Combined/provisional income = AGI (before SS) + tax‑exempt interest + ½ of Social Security.

Option 1 — Take your first RMD by December 31 of Year 1

• Year 1 AGI (approx.):
  • $65,000 (non‑SS income)
  • $17,000 (taxable SS, assuming 85%)
  • $45,000 (1st RMD)
  • = $127,000
    
• Year 2 AGI (approx.):
  • $65,000 (non‑SS income)
  • $17,000 (taxable SS, assuming 85%)
  • $46,000 (2nd RMD)
  • = $128,000

In Option 1, income stays relatively even across the two years.

Option 2 — Delay the first RMD until April 1 of Year 2

• Year 1 AGI (approx.):
  • $65,000 (non‑SS income)
  • $17,000 (taxable SS, assuming 85%)
  • $0 RMD
  • = $82,000
    
• Year 2 AGI (approx.):
  • $65,000 (non‑SS income)
  • $17,000 (taxable SS, assuming 85%)
  • $45,000 (delayed 1st RMD)
  • $46,000 (regular 2nd RMD)
  • = $173,000
    

In Option 2, two RMDs stack into a single tax year, creating a large AGI spike relative to both the prior year and Option 1. The April‑1 deferral rule is exactly what causes this bunching.

Why Does This Matter From a Tax-Bracket Perspective?

Tax brackets are progressive, meaning higher income is taxed at higher rates. In this example:

• In Option 1, your income stays within a similar range each year.
• In Option 2, the second year’s income jumps significantly, potentially pushing a portion of your income into a higher tax bracket.
  

That higher bracket doesn’t apply to all your income, but it can apply to the top portion, increasing the overall tax bill for that year. In addition, higher income may affect other calculations tied to adjusted gross income.

Is Delaying Your First RMD Always a Bad Idea?

Not necessarily. Delaying the first RMD may still make sense in situations such as:

• A lower-income year due to retirement timing
• A one-time income drop that creates temporary room in lower tax brackets
• Coordinating withdrawals with other planned income events

The key point is that this is not just a calendar decision; it’s an income-planning decision.

If you’re working with a financial advisor, this is often one of the first areas reviewed when transitioning from asset accumulation to income planning and capital preservation. At SGL Financial, these conversations typically focus on how RMD timing fits into your broader income and tax situation, and not just the impact of the deadline itself.

How Are RMD Amounts Calculated?

RMDs are calculated using:

• Your account balance as of December 31 of the prior year
• An IRS life expectancy factor based on your age
  

Most custodians calculate RMD amounts automatically, but accuracy still matters. You can also refer to the IRS RMD tables for more detailed information. It’s also important to know that while custodians often calculate RMDs, the IRS ultimately holds the account owner responsible for taking the correct amount on time.

Can I Combine RMDs From Multiple Accounts?

It depends on the account type.

For IRAs:

• RMDs can be calculated separately
• Withdrawals can often be taken from one or multiple IRA accounts
• Inherited IRA rules are complex and differ significantly from standard RMD rules, making careful review especially important.

For employer plans:

• RMDs generally must be taken from each plan separately
  

This distinction often trips people up, especially those with a mix of old 401(k)s and more recent IRAs.

How Does Timing Affect Cash Flow?

RMDs are not just a tax issue; they’re also a cash-flow decision. Questions to consider include:

• Do I want monthly withdrawals or a lump sum?
• Should withholding come from the RMD itself?
• How does this interact with Social Security or pension income?
• Does the timing of withdrawals affect which investments are being sold?

Spreading withdrawals throughout the year can help smooth cash flow, while a single withdrawal may simplify administration.

Should Taxes Be Withheld From an RMD?

RMDs are taxable, but withholding is optional. Some retirees:

• Elect withholding to cover part or all of their tax obligation
• Use RMD withholding as a substitute for quarterly estimated payments
  

Others prefer to pay taxes separately.

What Are Common First-Year RMD Mistakes?

Several missteps tend to occur around the first RMD:

Missing the Deadline: Failing to take an RMD on time can trigger penalties. While recent rule changes have reduced penalties in some cases, compliance still matters. If you miss your first-year RMD, the IRS imposes an excise tax, but the penalty structure is less severe than it used to be.

What Is the Penalty for Missing an RMD?

Since December 10, 2024:

• The penalty is 25% of the amount you failed to withdraw; 10% if the RMD is timely corrected within two years.

This penalty applies only to the missed distribution portion, and not your entire account balance.

Taking the Wrong Amount: Incorrect balances, outdated calculations, or misunderstanding aggregation rules can lead to under- or over-withdrawals.

Forgetting Old Employer Accounts: It’s common to overlook a small, legacy 401(k) from a prior employer that still carries its own RMD requirement.

Poor Timing Decisions: Taking two RMDs in one year without realizing the income impact is a frequent issue for first-time recipients.

Planning Miss: Failing to coordinate RMDs with Roth conversions or other tax-planning strategies earlier in retirement.

How Can Working With a Financial Advisor in Buffalo Grove Help with RMD Planning?

An SGL financial advisor in Buffalo Grove who is familiar with retirement planning can help:

• Review account structures
• Clarify RMD timing rules
• Coordinate withdrawals with other income
• Reduce administrative errors
  

At SGL Financial, we approach RMD planning as an integrated part of your retirement income strategy, not a standalone tax requirement. The rules may be the same for everyone, but how they affect your income, taxes, and long-term plan is unique. That’s why these decisions deserve to be considered within the context of your entire financial life. Connect with us to learn more about RMDs and for all planning needs.