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Required Minimum Distributions—or RMDs—represent one of those, “Let’s get this right” planning conversations for good reason. Because they don’t start out as something that you’re used to in your investing life, it can be easy for them to fall off your radar. Missing an RMD can lead to unnecessary penalties, not to mention potential tax headaches.
To get them on your radar, here are five RMD mistakes we focus on to help our clients avoid.
RMDs At a Glance
- The government requires you begin withdrawing funds from your tax-deferred retirement accounts, like traditional IRAs and 401(k)s
- They begin the year you turn 73
- They create a taxable event that shows up on your income when you receive them
- If you don’t do it by the book, there are penalties and pitfalls that could hurt your balance sheet…
Now, on to the mistakes.
1. Waiting Too Long to Take Your First RMD
This one has two parts. The first is that there are steep tax penalties for missing RMDs. You are supposed to take your first RMD the year you turn 73, or by April 15th the following year.
You do not want to flat out forget RMDs once you turn 73! For RMDs prior to 2023, the penalty was 50%. Now, the penalty is 25% with possible reductions if you correct the missed distributions within 2 years.
Going back to the starting line of turning 73, some people may choose to take their RMD by April the following year. While there is no penalty, you are taxed on the RMD in the year in which you receive it. And the only year that you are allowed to delay taking your RMD until the following year is the year in which you turn 73. So, if you delay taking your first RMD in the year that you turn 73, you will have to take 2 RMDs in the same year–one for age 73 and one for age 74. You end up with two years' worth of income, almost certainly increasing your tax bill and potentially increasing your entire tax bracket! That’s why we generally recommend making your first RMD in the year you turn 73.
2. Mixing Up the IRA and 401(k) Rules Around RMDs
If you’ve got multiple IRAs, you can look at all of them together when it comes to RMDs. You can take your total RMD for the year from one IRA or spread it across several. You have flexibility with IRA RMDs.
But 401(k)s are different. You can’t combine your 401k RMDs with your IRA RMDs. The amount that needs to come out of a 401(k) has to be withdrawn from that specific account. The RMD on each 401(k) account cannot be combined with or taken from any other accounts.
We’ve seen this get overlooked. People think one big IRA withdrawal covers everything, but the IRS sees it differently. It’s absolutely necessary to stay on top of timing and organization and maintenance of your different retirement accounts. Pulling the right money from the right accounts is a key component of avoiding penalties and headaches.
3. Taking Distributions From Every IRA—When You Don’t Have To
We also see folks with several IRAs who think they have to take a portion of their RMD from each one. That’s not the case.
You’re allowed to calculate your total IRA RMD across accounts, then take it from whichever IRA—or combination of IRAs—makes the most sense.
It’s a small thing, but it can make the process a lot more efficient. One well-timed distribution could do the trick, rather than five small ones scattered across different IRA accounts.
4. Taking the RMD—Even When You Don’t Want the Income
We hear this pretty often: "I don’t want the RMD. I’d rather leave the account alone and keep the money in there."
Maybe you’ve got other assets. Maybe you don’t need the income. But once you reach the required age, the government doesn’t give you the option to skip it.
So how can you satisfy your RMD requirement without adding to your tax bill? That’s where Qualified Charitable Distributions come in. You can donate directly from your IRA to a qualified charitable organization, and it never touches your taxable income while simultaneously satisfying your RMD requirement.
You’re avoiding the recognition on your income taxes and giving to causes that mean something to you. If you’re already charitably inclined and would be donating out of other assets anyway, this is a smart and meaningful way to satisfy the RMD without increasing your tax bill.
5. Overlooking the Tax Impact
RMDs are taxed as ordinary income, and that can have a ripple effect.
The extra income might bump you into a higher tax bracket, affect your Medicare premiums, or increase your taxable Social Security.
A lot of folks take the RMD without budgeting for the tax bill that comes later. So, before you hit “withdraw,” take a step back and look at your whole income picture. A little coordination can go a long way.
Final Thoughts
RMDs are one of those areas where a little planning makes a big difference. Whether it’s understanding the rules for different accounts, being strategic about timing, or finding ways to reduce the tax bite, this is one of those retirement details worth getting right.
If you’re unsure about how your RMDs fit into your bigger financial picture, let’s talk. This is one area where good advice really matters.