Avoiding These 4 Regular Required Minimum Distribution (RMD) Errors
In the world of retirement accounts, understanding and adhering to the Required Minimum Distributions (RMDs) is crucial. Here's a guide to help retirees avoid common pitfalls when calculating and withdrawing RMDs.
RMDs, mandatory withdrawals from retirement accounts, are a part of financial planning for those aged 73 (or 75, if born in 1960 or later). The amount is calculated based on age and the balance of retirement accounts, and each spouse must satisfy RMD requirements separately.
One of the most common mistakes to avoid is miscalculating the RMD amount. This can occur if the correct account balance as of December 31 of the previous year is not used or if the wrong IRS life expectancy table is applied. For example, the Uniform Lifetime Table is typically used, but it may change to the Joint Life and Last Survivor Expectancy Table if your spouse is more than 10 years younger and the sole beneficiary.
Another common error is missing the RMD deadline, which is typically December 31 each year. Missing this deadline can result in a steep excise tax penalty of 25% of the amount not withdrawn, though it can be reduced to 10% if corrected timely.
Inherited IRAs have different RMD calculation and withdrawal requirements that should not be overlooked.
It's also important to remember that while IRAs can be aggregated and the total RMD taken from a single IRA, this aggregation does not apply to 401(k) or other workplace plans, which must be calculated and withdrawn separately to avoid penalties.
Overlooking market fluctuations when using prior year-end balances for RMD calculations can lead to mismatched withdrawal amounts, especially in volatile markets. RMDs must be based on the previous year's balance, not the current value.
Qualified Charitable Distributions (QCDs) can count toward satisfying your RMD if you are 70½ or older. Missing the opportunity for a QCD could mean higher taxable income than necessary.
To ensure prompt RMD withdrawals and avoid missing deadlines, it's recommended to set up automated withdrawals or reminders.
If retirement accounts hold non-publicly traded assets, such as stock, real estate, or ownership interests in certain entities, sufficient cash should be available to meet RMD obligations, as these assets may take months to liquidate for RMD purposes.
For those who continue to work past the RMD age, the still-working exception may allow postponement of RMDs. However, it's important to note that it's not permissible to withdraw enough from one account to fulfill both spouses' RMDs. Failure to do so will likely result in a penalty for the spouse whose account was untouched.
In the case of married couples filing taxes jointly, each spouse is responsible for their own RMDs. To be eligible for the still-working exception, one must be actively employed by the business that sponsors the retirement plan, not own more than 5% of the business, and the plan must have formally elected to include the still-working exception.
By carefully calculating each account’s RMD using the correct method, taking withdrawals on time, adhering to aggregation rules, and considering tax strategies like QCDs, retirees can avoid costly IRS penalties and minimize taxable income spikes.
Managing personal-finance becomes crucial during retirement, especially when dealing with Required Minimum Distributions (RMDs). Miscalculating the RMD amount or missing the RMD deadline can result in severe penalties. Furthermore, in the case of inherited IRAs, the calculation and withdrawal requirements differ and should not be neglected.
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