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7 of the Biggest RMD Mistakes People Make
Are you making any of these common RMD mistakes?
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When it comes to Required Minimum Distributions (RMDs), even the most seasoned investors can make costly mistakes.
These distributions, mandatory after reaching age 73, could potentially impact your retirement strategy if mishandled.
Consulting a fiduciary financial advisor can be a great first step to factoring RMDs, and the potential tax repercussions, into your retirement plan. That's why SmartAsset created a free tool to help match you with up to three financial advisors.
Click here to take SmartAsset’s quick retirement quiz and get matched with vetted advisors who serve your area in just a few minutes, each obligated to work in your best interest.
Research suggests people who work with a financial advisor could end up with about 15% more money to spend in retirement.1
A 2022 Northwestern Mutual study found that 62% of U.S. adults admit their financial planning needs improvement. However, only 35% of Americans work with a financial advisor.2
Here are seven common RMD mistakes and how to avoid them.
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7 of the Biggest RMD Mistakes People Make
1. Ignoring the RMD Deadline
One of the most critical mistakes can be missing the RMD deadline, which could result in a hefty 50% tax penalty on the amount that should have been withdrawn.
The deadline for most retirement accounts 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). It can be a good idea to mark your calendar and set reminders to avoid this potentially costly error.
2. Forgetting to Take the RMD
Similarly to ignoring the deadline, it can be surprisingly easy to forget to take your RMD, especially if you have multiple retirement accounts.
Again, the penalty for missing an RMD is steep: 50% of the amount that should have been withdrawn. This is another reason to set reminders for RMD withdrawals.
3. Incorrectly Calculating the RMD Amount
Calculating the correct RMD may be complex, involving your account balance and a life expectancy factor from IRS tables.
Miscalculations could lead to insufficient withdrawals and potential penalties. You could consider using an RMD calculator or consulting a financial advisor to help ensure accuracy.
4. Not Understanding the Different RMD Rules for Different Accounts
Different types of retirement accounts may have different RMD rules.
For instance, Roth IRAs do not require RMDs during the account owner's lifetime, but other accounts like traditional IRAs and 401(k)s may. Misunderstanding these distinctions could lead to compliance issues and potential 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 account type.
Failing to take these RMDs could also result in potential penalties. Understanding the beneficiary rules can be essential to avoiding unexpected tax liabilities.
6. Consolidating Savings Too Late
Consolidating your retirement accounts into one can simplify RMD calculations and withdrawals, but doing so too late could potentially reduce the benefits of compound interest.
If you’re considering consolidation, it can be important to consider the timing and impact on your overall potential investment growth. Early consolidation could also potentially reduce administrative fees, which could help you retain more of your savings.
7. Neglecting to Update Your RMD Strategy
Regularly reviewing and updating your RMD strategy can be important.
Changes in tax laws, your financial situation, or life expectancy could all potentially impact your RMDs. Staying proactive and considering consulting with a financial advisor could potentially help ensure your strategy remains optimal and compliant with current and future regulations.
How to Get Help With RMD Planning
Understanding and avoiding these common RMD mistakes could potentially help safeguard your retirement savings.
If you're unsure about handling your RMDs, that’s where a fiduciary financial advisor can be invaluable.
Fiduciaries may be able to help you understand your options when it comes to planning for RMDs and minimizing your tax liability. Additionally, any conflicts of interest must be disclosed, and fiduciaries are obligated to work in your best interest.
Finding a fiduciary shouldn't be that hard. Thankfully, now it isn't.
SmartAsset’s free matching quiz can match you with up to three fiduciary advisors who serve your area. From there, you can compare and decide which advisor to work with. All advisors on the matching platform have been vetted through our proprietary due diligence process.
The quiz takes just a few minutes, and in many cases, you can be connected instantly with an advisor to have an introductory call.
Click Your State to Get Matched With Financial Advisors Who Serve Your Area
After you choose your state and answer a few questions, you can compare up to three advisors that serve your area and decide which to work with.
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