7 of the Biggest RMD Mistakes — and How to Avoid Them

Required Minimum Distributions (RMDs) are a critical aspect of retirement planning, but they can also be a source of confusion and costly mistakes. To help protect your retirement savings, it’s important to understand the most common RMD mistakes and how to avoid them. Here are seven key pitfalls to watch out for:

1. Ignoring the RMD Deadline
One of the most significant mistakes you can make is missing the RMD deadline. For most retirement accounts, the deadline is December 31 each year. However, for your first RMD, you have until April 1 of the year following the year you turn 73 (if you reached age 72 after December 31, 2019). Missing this deadline can result in a 50% tax penalty on the amount that should have been withdrawn, so it’s essential to mark your calendar and set reminders.

2. Forgetting to Take the RMD
It’s surprisingly easy to forget to take your RMD, especially if you have multiple retirement accounts. This mistake carries the same steep 50% penalty as missing the deadline. To avoid this, consider setting up automatic withdrawals or working with a financial advisor to manage your RMDs.

3. Incorrectly Calculating the RMD Amount
Calculating your RMD can be complex, involving your account balance and a life expectancy factor from IRS tables. Miscalculations can lead to insufficient withdrawals and penalties. Using an RMD calculator or consulting with a financial advisor can help ensure you’re withdrawing the correct amount.

4. Not Understanding the Different RMD Rules for Different Accounts
Different retirement accounts have different RMD rules. For instance, Roth IRAs don’t require RMDs during the account owner’s lifetime, but traditional IRAs and 401(k)s do. Misunderstanding these rules can lead to compliance issues and financial penalties.

5. Overlooking Beneficiary RMDs
If you inherit a retirement account, you may be required to take RMDs, depending on your relationship to the deceased and the type of account. Failing to do so can result in penalties, so it’s essential to understand the beneficiary rules.

6. Consolidating Savings Too Late
Consolidating your retirement accounts can simplify RMD management, but doing so too late can reduce the benefits of compound interest. Early consolidation can also help minimize administrative fees and make it easier to manage your withdrawals.

7. Neglecting to Update Your RMD Strategy
Your RMD strategy should be regularly reviewed and updated. Changes in tax laws, your financial situation, or life expectancy can all impact your RMDs. Staying proactive and consulting with a financial advisor can help ensure your strategy remains optimal and compliant.

Take Action Right Away
Avoiding these common RMD mistakes can help safeguard your retirement savings and ensure you’re making the most of your investments. If you’re unsure about handling your RMDs or need help updating your strategy, scheduling an appointment with a financial advisor is a smart move. We can provide personalized guidance to help you navigate the complexities of RMDs and keep your retirement plan on track.

By Mark Roberts|2024-09-17T08:59:04-05:00September 17th, 2024|Retirement|0 Comments

About the Author: Mark Roberts

In addition to managing clients’ money and giving investment and diversification advice, Mark offers something that “the other guys” don’t - a unique approach to Retirement Tax Strategies and distribution. Time and time again, Mark meets with new clients who tell him they have a great relationship with their financial advisor but have never been offered information on this kind of approach to securing their financial futures. Mark has taken this feedback to heart and works tirelessly to ensure that his strategies focus on taxes and distribution. Mark started selling insurance for a major insurance company right out of high school to help put himself through college. After graduating with a degree in finance, he dove into estate planning on the financial side to set himself apart from other financial advisors. However, as changes were made to estate tax laws over time, Mark shifted his focus to income tax strategies. Mark’s philosophy is “the blue prints are more important than the wall paper or carpet.” The wall paper and carpet represent products like investments and insurance policies, whereas the blue prints represent the strategies. Once strategies that truly fit the client’s needs are put in place, our focus can shift to providing you with the right products. According to Mark, “It doesn’t matter what carpet we use if the walls are not in the right place.” Our approach to money management is designed to generate the largest alpha (quality) with the lowest standard deviation and beta (risk). By doing this, we help provide clients with the highest return on the lowest risk. Generating income for our retirees is also very important. Because withdrawing money from your portfolio hurts the account rather than helping it, our goal is to design income strategies to harm the portfolio the least making the money last longer.

7 of the Biggest RMD Mistakes — and How to Avoid Them

7 of the Biggest RMD Mistakes — and How to Avoid Them

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About the Author: Mark Roberts