Avoiding Costly RMD Mistakes: What You Need to Know

Required Minimum Distributions (RMDs) are a crucial part of managing retirement accounts, yet they can be a source of significant blunders that may have costly consequences. Understanding the common pitfalls associated with RMDs is essential to protect your retirement savings. Here are seven common mistakes to avoid:

1. Missing the RMD Deadline

Failing to withdraw your RMD by the deadline is one of the most severe errors you can make. Typically, the deadline is December 31st each year, but for your first RMD, you have until April 1st of the year after you turn 73 (if you reach 72 after December 31, 2019). Missing this date can trigger a steep 50% tax penalty on the amount that should have been taken. To prevent this, mark your calendar and set up reminders well in advance.

2. Overlooking the RMD Requirement

With multiple retirement accounts, it’s easy to overlook taking your RMD. Like missing the deadline, forgetting to withdraw the required amount comes with a significant penalty. Setting up automatic withdrawals or working with a financial planner can help you stay on top of your RMDs and avoid penalties.

3. Miscalculating the RMD

Determining the correct RMD can be challenging, as it involves your account balance and an IRS-provided life expectancy factor. An incorrect calculation can result in insufficient withdrawals and penalties. Utilizing an RMD calculator or seeking professional advice can help ensure that you withdraw the correct amount.

4. Confusing RMD Rules Across Different Accounts

Each type of retirement account has specific RMD rules. For example, while Roth IRAs do not require RMDs during the account holder’s lifetime, traditional IRAs and 401(k)s do. Misunderstanding these differences can lead to unintentional errors and penalties.

5. Failing to Take Beneficiary RMDs

If you inherit a retirement account, you may need to take RMDs based on your relationship with the deceased and the account type. Not adhering to these rules can lead to penalties. Understanding your obligations as a beneficiary is key to avoiding mistakes.

6. Delaying Account Consolidation

Consolidating retirement accounts can simplify RMD management, but waiting too long may diminish the benefits of compounding interest. Early consolidation also helps streamline the process, potentially reducing fees and easing the management of your RMDs.

7. Neglecting to Reevaluate Your RMD Strategy

As tax laws and personal circumstances evolve, so should your RMD strategy. Regular reviews can ensure your approach remains effective and compliant. A financial advisor can help you adjust your plan as needed.

Take Control of Your RMDs

Avoiding these common RMD mistakes is essential for preserving your retirement savings. If you need assistance with RMD planning or want to revisit your strategy, schedule an appointment with us. Professional guidance can help you navigate the complexities of RMDs and keep your retirement on track.