10 RMD Mistakes to Avoid

A helpful guide to dodging common Required Minimum Distribution errors.

Provided by Angel McCall CFP®

Turning 70 is a big milestone in anyone's life, and gives reason to celebrate a lifetime of experiences, changes, and most likely a long career now giving way for retirement. The IRS, however, is more concerned about your turning 70 ½. This is the age when you are required to begin withdrawing from your 401k, IRA, or other tax-deferred retirement plan.

Required Minimum Distributions, or RMDs, are amounts of money you are required to withdraw annually. If you miss the minimum distribution, you may be required to pay a fee of up to 50% of the amount that should have been withdrawn. It’s easy to make errors when figuring out the timing of RMDs, That’s why I’ve put together this helpful guide to ensure you can avoid these 10 common mistakes.

1. Taking Your RMDs at the Wrong Time

When you should start taking your RMDs depends on your birthday. It comes down to two categories- If you were born in January through June, you will turn 70 ½ the same year you were born, and thus can begin your RMDs before December 31st of that year. If you were born July through December, the deadline shifts to December 31st in the following year. If you are a January through June baby, you can choose to delay your first RMD to April 1st the year after you turned 70, but this also means you will have to take your next year’s RMD in the same year on December 31st.

2. Not Realizing the Extra Costs of Delaying Your First RMD

Delaying your first RMD will result in taking two amount the same year. This higher amount could result in you then being bumped up into a higher tax bracket, and make you subject to the Medicare high-income surcharges. This happens if your gross income rises above $85,000 if you’re single or $170,000 if you are married and filing jointly. Your Social Security benefits could also be subject to taxes by showing this extra income.   

3. Withdrawing the Wrong Amount

To find how much your RMDs are, you need to divide the balance in your accounts from the previous year by your life expectancy based on your age. Most people use the Uniform Lifetime table (Table III) in Appendix B of IRS Publication 590-B. You can also use this RMD calculator to figure out the amount. Table II, the Joint Life and Last Survivor table, is used if your spouse is your sole beneficiary and is more than 10 years younger than you. (Most beneficiaries who inherit an IRA use Table I.)

4. Not Realizing that the RMD Rules Differ for IRAs and 401(k)s

If you have more than one IRA, you will need to add up the balance in each one, then divide that amount by the life-expectancy factor for your age and then withdraw that amount from any of your traditional IRA accounts. For 401(k) however, you will need to calculate the RMD for each account separately, and take the required yearly amount from each one.  

5. Neglecting to Take RMDs from Roth 401(k)s

Roth IRAs don’t require you to take RMDs, but Roth 401(k)s do! Even though the amounts taken from Roth 401(k)s are not taxable, unless you are still working for the employer you will need to take out the required amount each year.

6. Not Understanding the Special RMD Rules if You’re Working After 70½

If you are still working after 70 ½ , you will not be required to take RMDs from your current employer’s 401(k) (provided you don’t own more than 5% of the company). You will however be required to take the RMDs from any previous employers’ 401(k)s and IRAs once you reach 70 ½ years of age even if you continue to work.

7. Thinking that You Can Avoid Your RMD by Converting an IRA

You can convert a traditional IRA to a Roth IRA and will then not be subject to RMDs in the future, but you will still need to take the RMD the year you switch over.

8. Using the Wrong Procedure to Make a Tax-Free Transfer from Your IRA to Charity

If you decide to make a donation to charity through your traditional IRA, the amount is tax-free and can be up to $100,000. However, the donation must be made directly from your IRA to the charity to remain tax-free. If you withdraw the amount first and then write a check to your chosen charity, the amount with then be taxed. The procedures can vary by organization, so ask your IRA administrator for its requirements. If you choose to donate, the amount counts as your RMD, but is not included in your adjusted gross income.

9. Not Specifying Which Investments to Tap

Before IRA or 401(k) administrations begin taking the RMD money out haphazardly from your accounts, it’s a good idea to shift some money into fixed investments. This can include stocks or funds that might still have growth potential. This precaution can save you money in the long run as you prepare for your RMDs. Ask your administrator to only tap accounts you specify before the December 31st RMD deadline.

10. Taking Your RMD from Your Spouse’s IRA or 401(k)

Even if you and your spouse file a joint income tax return, IRA and 401(k) accounts are owned individually. The RMDs must be calculated and withdrawn separately from each person’s accounts. “Taking your RMD from your spouse’s IRA will not satisfy your RMD and vice versa,” says Gregory Oray, president and investment adviser representative of Oray King Wealth Advisors. (See his article, Avoid the 5 Biggest IRA RMD Mistakes, for more information.)

   


Citations.

1 - nerdwallet.com/blog/investing/average-stock-market-return/ [2/28/18]

2 - bankrate.com/calculators/savings/compound-savings-calculator-tool.aspx [7/26/18]

3 - valuepenguin.com/average-savings-account-interest-rates [7/26/18]