Urgent: Avoid These 3 RMD Mistakes to Dodge Heavy Penalties

UPDATE: As the end of the year approaches, retirees must act swiftly to manage their required minimum distributions (RMDs) from tax-advantaged accounts like 401(k)s and IRAs. Failing to comply with RMD rules can result in severe penalties of up to 25% on unwithdrawn amounts. With the deadline looming on December 31, 2023, here are three critical mistakes to avoid right now.

1. Missing the Deadline
The IRS mandates that RMDs be taken by the end of the calendar year. Missing this deadline can trigger a hefty 25% penalty on the amount that should have been withdrawn, as confirmed by Kiplinger. If you correct the mistake within two years, this penalty can be reduced to 10%, but the financial hit is still significant.

First-time RMDs have a slight variation: you must take your initial distribution by April 1, 2024, if you turn 73 this year (or 75 if born in 1960 or later). But be cautious; delaying means taking two distributions in one year—this could lead to a larger tax bill than anticipated, as noted by Investopedia.

2. Miscalculating RMD Amounts
Many retirees struggle to accurately compute their RMDs, often due to confusion over IRS life expectancy tables or account balances. Failing to withdraw the correct amount can lead to a 25% penalty on the shortfall, in addition to regular income tax. Fortunately, your 401(k) plan administrator or IRA custodian can assist with calculations. However, be aware that rollovers or transfers might affect the amount calculated, warns Morningstar.

3. Confusing Rules for Different Accounts
Retirees often face challenges when managing multiple account types, such as 401(k)s and IRAs. Each 401(k) must have its RMD calculated and withdrawn separately, meaning you cannot combine them with IRAs. However, for traditional IRAs and 403(b) accounts, you can total your RMDs and withdraw the total from any one or multiple accounts, as explained by The Motley Fool. Misunderstanding these rules can lead to insufficient withdrawals and penalties.

To help navigate these complexities, consulting with a tax professional or financial advisor is highly recommended. The stakes are high, and the time to act is NOW. Ensure that you are compliant with RMD regulations to avoid unnecessary financial penalties.

WHAT’S NEXT: As we approach the end of the year, stay vigilant about your RMD obligations. Review your accounts, consult professionals, and ensure you meet all withdrawal requirements to avoid costly mistakes. Share this information with fellow retirees to help them sidestep these potential pitfalls.