Required Minimum Distributions (RMDs) can trip up even the most careful savers. If you have a traditional IRA, 401(k), or similar retirement account, you can’t avoid them forever. The IRS requires you to start taking RMDs at a certain age, and the rules are strict. Mistakes can lead to big penalties, higher taxes, and even missed opportunities for your heirs. Understanding RMDs isn’t just about following the law—it’s about protecting your money. Here are the most common and costly mistakes people make with RMDs, and how you can avoid them.
1. Missing the RMD Deadline
Missing your RMD deadline is one of the most expensive mistakes you can make. The IRS requires you to start taking RMDs by April 1 of the year after you turn 73 (for most people). If you miss this deadline, the penalty is steep: 25% of the amount you should have withdrawn. That’s not a small fee. Even if you fix the mistake, you might still owe a 10% penalty. Mark your calendar, set reminders, and double-check with your financial institution. Don’t assume they’ll remind you. The responsibility is yours.
2. Calculating the Wrong RMD Amount
RMDs aren’t a flat number. They’re based on your account balance at the end of the previous year and your age. If you use the wrong balance or the wrong IRS life expectancy table, you could withdraw too little or too much. Withdrawing too little means penalties. Withdrawing too much could push you into a higher tax bracket. Use the IRS worksheets or an online RMD calculator to get it right. If you have multiple accounts, you need to calculate the RMD for each one, though you may be able to take the total from one account in some cases.
3. Forgetting About All Your Accounts
It’s easy to forget an old 401(k) or IRA from a previous job. But the IRS doesn’t forget. You must include all your traditional IRAs and most employer-sponsored plans when calculating your total RMD. If you miss one, you could face penalties. Make a list of every retirement account you own. Check with past employers and financial institutions. Consolidating accounts can make this process easier, but be careful—rollovers have their own rules.
4. Taking RMDs From the Wrong Account
If you have several IRAs, you can take your total RMD from any one or combination of those IRAs. But if you have 401(k)s from different employers, you must take the RMD from each 401(k) separately. Mixing this up can lead to mistakes and penalties. Know the rules for each type of account. If you’re unsure, ask your plan administrator or a tax professional. Don’t guess.
5. Not Considering the Tax Impact
RMDs are taxed as ordinary income. Taking a large RMD can push you into a higher tax bracket, increase your Medicare premiums, or even trigger taxes on your Social Security benefits. Some people wait until the last minute to take their first RMD, which can mean two withdrawals in one year. That can double your tax bill. Plan ahead. Consider spreading withdrawals throughout the year or starting earlier if it makes sense for your tax situation.
6. Ignoring RMDs on Inherited Accounts
If you inherit a retirement account, you may have to take RMDs, even if you’re younger than 73. The rules for inherited IRAs and 401(k)s are different and can be confusing. Some beneficiaries must empty the account within 10 years. Others can stretch distributions over their lifetime. If you don’t follow the rules, you could face penalties and lose tax advantages. Review the rules for inherited accounts as soon as you become a beneficiary.
7. Failing to Revisit Your Withdrawal Strategy
Life changes. So do your finances. Many people set their RMD strategy once and never look at it again. But changes in tax law, your health, or your spending needs can all affect the best way to take RMDs. Review your plan every year. Adjust as needed. This can help you avoid surprises and make the most of your retirement savings.
8. Overlooking Qualified Charitable Distributions (QCDs)
If you’re charitably inclined and over 70½, you can use a Qualified Charitable Distribution (QCD) to satisfy your RMD. The money goes directly from your IRA to a qualified charity and doesn’t count as taxable income. This can lower your tax bill and help a cause you care about. Many people don’t know about this option or forget to use it. If you give to charity, consider using a QCD for your RMD.
9. Not Getting Professional Help When Needed
RMD rules are complex. Tax laws change. Your situation might be unique. Trying to handle everything yourself can lead to mistakes. If you’re unsure, get help from a tax advisor or financial planner who understands RMDs. The cost of advice is often much less than the cost of a mistake.
Protect Your Retirement: Stay Ahead of RMD Mistakes
Required Minimum Distributions are more than just a box to check. They can affect your taxes, your retirement income, and your legacy. Small mistakes can cost you thousands. Take the time to understand the rules, keep good records, and ask for help when you need it. Staying on top of your RMDs means more money in your pocket and less stress down the road.
Have you ever made an RMD mistake or found a helpful strategy? Share your experience in the comments.
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Travis Campbell is a digital marketer and code developer with over 10 years of experience and a writer for over 6 years. He holds a BA degree in E-commerce and likes to share life advice he’s learned over the years. Travis loves spending time on the golf course or at the gym when he’s not working.
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