Required Minimum Distributions (RMDs) are a key part of retirement planning but can be confusing, especially with recent changes under the SECURE 2.0 Act. Avoiding these common mistakes can help you save money and avoid penalties.
1. Miscalculating the RMD Amount
Many retirees struggle with determining their RMD due to confusion about IRS life expectancy tables and account balances.
How to Calculate:
- Find your account balance as of December 31 of the prior year.
- Use the IRS life expectancy factor for your age.
- Divide the balance by the factor.
- Example: $100,000 ÷ 26.5 = $3,773.58.
Tax Penalty: Withdrawing less than required can result in a 25% penalty on the shortfall, plus income tax.
2. Missing the RMD Deadline
You must take your RMD by December 31 annually (or April 1 for your first RMD).
Tax Penalty: A 25% penalty applies to missed amounts, but this can be reduced to 10% if corrected within two years.
3. Not Taking RMDs from Inherited IRAs
Beneficiaries must follow specific rules for inherited accounts, often withdrawing all funds within 10 years of the original account holder’s death.
Tax Penalty: Missing these RMDs can result in a 25% penalty on the undistributed amount.
4. Misunderstanding the “Still Working” Exception
The “still working” exception allows you to delay RMDs only from your current employer’s plan. It doesn’t apply to IRAs or plans from previous employers.
Tax Penalty: Applying this exception incorrectly can lead to penalties on missed RMDs.
5. Misapplying Aggregation Rules
You can combine RMDs from multiple IRAs and withdraw from one account. However, this doesn’t apply to 401(k)s, which must be calculated and withdrawn separately.
Tax Penalty: Aggregating incorrectly can result in insufficient withdrawals and penalties.
6. Ignoring Market Fluctuations
Your RMD is based on your account balance from the prior year, which might not reflect market volatility.
Tax Impact: Not accounting for market changes can lead to errors. Consult a financial planner to adjust your strategy.
7. Missing Qualified Charitable Distributions (QCDs)
Retirees 70½ and older can donate up to $105,000 directly to charity from their IRA to satisfy RMDs without increasing taxable income.
Tax Benefit: QCDs lower your taxable income and can help reduce taxes on Social Security benefits, Medicare premiums, and tax brackets.
Plan Ahead
RMD mistakes can cost you in taxes and penalties. Stay informed, plan carefully, and consult a financial advisor or tax professional to make the most of your retirement savings.
Read more about RMD mistakes when you read Protect Your Retirement: Seven RMD Mistakes to Avoid.