If you’re approaching age 73, it’s time to start thinking about your required minimum distributions (RMDs). The IRS mandates withdrawals from tax-deferred retirement accounts like IRAs, TSPs, and other employer-sponsored plans. While the rules may seem simple, many federal employees make costly mistakes, leading to unexpected tax bills, penalties, and lost opportunities.
Understanding federal employee RMD rules can help you make important decisions, such as the timing of your first RMD, how you handle tax withholding, and whether you consolidate accounts. Each of these factors has the potential to affect your long-term retirement strategy. Taking the right approach could mean keeping more of your money, reducing tax burdens, and helping your savings last longer.
Initial RMD Requirements
If you turned 72 in 2023 or later, federal laws require you to take your first RMD by April 1 of the year after you turn 73. In subsequent years, you must take your RMD by December 31 of each year. If you fail to take the required amount in any year, you’ll be hit with a penalty of 25% of the amount you were required to withdraw.
For example, if you’re required to withdraw $10,000 and fail to take it, you will owe the IRS a $2,500 penalty, in addition to still having to withdraw and pay taxes on the full $10,000.
When to Take Your First RMD
While the IRS gives first-time RMD takers until April 1 of the following year to take their withdrawals, delaying could potentially create a tax issue. If you wait until April 1 for your first RMD, you’ll still need to take your second RMD by December 31 of that same year. This could push you into a higher tax bracket.
If your income will be significantly lower in the next year — for example, if you’re planning to retire — then waiting for your first withdrawal may help reduce taxes. Otherwise, withdrawing your first RMD by December 31 of the year you turn 73 can help spread out taxable income and may prevent unnecessary tax burdens.
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Tax Withholding Strategies for RMDs
RMDs are taxed as ordinary income, which means they can push you into a higher tax bracket if not managed properly. To avoid surprises, you can choose to have federal taxes withheld directly from your RMD at a percentage or flat dollar amount. Another option is to make quarterly estimated tax payments to prevent underpayment penalties.
Managing RMDs Across Multiple Retirement Accounts
Federal retirees with multiple retirement accounts must carefully coordinate TSP required minimum distributions (RMDs), IRA withdrawals, and other employer-sponsored plan RMDs. While you can consolidate multiple TSP accounts into one, TSP RMDs must still be calculated and withdrawn separately from IRAs and other retirement plans — you cannot combine TSP and IRA RMDs. If you have multiple TSPs from different federal jobs, rolling them into one may simplify withdrawals, improve diversification, and align your investments with long-term financial goals.
However, TSP rollovers come with pros and cons, including differences in fees, investment options, and withdrawal flexibility. A financial professional can help determine whether consolidating TSP accounts or keeping them separate is the best approach for your retirement strategy.
Take Control of Your RMD Strategy
With careful planning, RMDs don’t have to be a burden. Understanding your withdrawal deadlines, tax implications, and account coordination can help you avoid penalties and unnecessary taxes. Since every financial situation is unique, working with a professional can help you optimize your strategy, minimize tax burdens, and ensure your withdrawals align with your long-term goals. Reach out to the team at Serving Those Who Serve at [email protected] for personalized guidance.
The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Serving Those Who Serve writers and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy suggested. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment or financial decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. **
