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Retired Military Finances 101: First In; Last Out Thumbnail

Retired Military Finances 101: First In; Last Out

Retirement Funding Taxes

I started out in the USAF as a Forward Air Controller (FAC) and I flew the mighty O-2A. We had a saying, First In; Last Out. It had to do with the fact that FACs arrived on target before the fighters and were there after the fighters left. To be honest, that really doesn't have much to do with today's blog post. Today we're going to talk about First Out. And, it has to do with your Required Minimum Distributions.

RMDs First

After you reach your Required Beginning Date (RBD) age, which is likely age 73 or 75 unless you've already reached your RBD of 72 or 70 1/2 (RBD has changed over the years due to tax law changes). Once you hit your RBD, you have to start taking Required Minimum Distributions (RMD) from your pre-tax retirement accounts, like Traditional IRAs and many employer retirement accounts. And here is the deal. Once RMDs are required, the first dollar out of your retirement account each and every year must be counted towards your RMD.

First Out Can Bite You

It is quite possible that you could make a mistake with this rule, especially if you're doing Roth conversions after reaching your RBD. Depending on when you retire you may be still making Roth conversions when you hit your RBD. Here are a couple ways you could get bit.

  • RBD year. You get to delay your first RMD until 1 Apr of the year after you reach your RBD (I don't know why they couldn't make it 15 Apr...it would be a lot easier to remember). So, you think to yourself, "I'll do a Roth conversion this year, since I don't have to take my RMD until next year. My income will be lower, and I'll get the conversion done at lower tax rate." True...but. You have a RMD requirement the year you reach your RBD, you can just delay it. So, the first dollars out count towards your RMD. And here is the rub. You can't do a Roth conversion with RMD funds.
  • Any year after your RBD year. The conventional wisdom is to do Roth conversions early in the year, to get tax-free growth started, and RMDs late in the year to defer the tax. But you can't do that because the money you take out early in the year has to be used towards your RMD first. To do a Roth conversion early in the year, you first have to take your RMD. Or, you have to delay your Roth conversion to until after you've taken your RMD later in the year.

As far as I know, you IRA custodian won't protect you from this. They might. But I wouldn't count on it.

Military Finances are Different

This tax law applies to all taxpayers. That isn't always the case. There are many unique financial and tax benefits available to Active and Retired military members that aren't available to civilians. That's why we think you should work with a financial planner or advisor that works with people like you each and every day. If you'd like to find out how we work with Active and Retired Senior Military Officers and NCOs, use the button below to schedule a free, initial consultation.

If you found this article useful, you might like the following blog posts:

Retired Military Finances 301: I Inherited Mom's (or Dad's) IRA. How do I Minimize my Tax Bill?


Retired Military Finances 201: 457 Plans. Not Like the Others.


Retired Military Finances 201: The New "Extra-Mega-Special-Bonus Catch-up Contribution"


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