3 of the Worst RMD Mistakes Retirees Make -- and How to Avoid Them
Key Points
Required minimum distributions, or RMDs, can cause steep penalties when they're missed.
Planning poorly could also result in a larger tax bill.
The right strategies could boost your finances and make RMDs less painful.
- The $23,760 Social Security bonus most retirees completely overlook ›
Saving for retirement in a traditional individual retirement account (IRA) or 401(k) is appealing because you get an up-front tax break on your money. But once you turn 73 or 75, depending on the year you were born, you'll be forced to take required minimum distributions, or RMDs, from a traditional retirement account.
RMDs can be a hassle if they're not planned for carefully. In fact, here are three of the worst RMD mistakes retirees risk making.
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1. Missing the deadline
The deadline for taking RMDs each year isn't some random date that's tough to remember. Rather, it's Dec. 31.
The problem, though, is that December can get busy. And if you're too wrapped up in holiday planning or other things to think about RMDs, you risk forgetting to take them in time.
A missed RMD could result in a 25% penalty on the sum you don't remove from your IRA or 401(k). For example, a $20,000 RMD you don't take by Dec. 31 could cost you $5,000.
To avoid that penalty, consider putting your RMDs on autopilot. Most financial institutions let you set up automatic RMDs on a schedule that works for you, whether it's quarterly withdrawals or annual distributions.
2. Deferring the first RMD
You're allowed to defer your first RMD to April 1 of the year following your 73rd or 75th birthday (whichever one you first become liable for RMDs). Doing so might seem like a good idea, since it means deferring a tax bill. But it's a move that might backfire.
If you defer that initial RMD, you'll have to take two RMDs the next year. If those withdrawals are substantial, you could end up in a very high tax bracket, causing those RMDs to cost you more. So, before you put off your initial RMD, you may want to talk to a tax professional or financial advisor about whether taking it on time makes more sense.
3. Forgetting about QCDs
The problem with RMDs is that they're a taxable event -- unless you donate the money to a charity directly via a qualified charitable distribution, or QCD. If you go that route, you can support a cause you care about by increasing your tax burden.
It pays to look at QCDs if you don't need to spend your RMD and are likely to be in a higher tax bracket once that mandatory withdrawal is taken. While you can do QCDs only from an IRA, you can simply roll 401(k) funds into an IRA to pull one off.
RMDs can be less painful financially when they're planned carefully. Be mindful of the annual deadline and use different strategies to minimize the tax hit RMDs can cause.
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