Required Minimum Distributions Mistakes

The IRS requires you to take money out of your tax-deferred retirement accounts once you reach the age of 70½. Taxed at your ordinary income tax rate, these annual required minimum distributions (RMDs) are calculated by dividing a retirement account’s balance at the end of the previous year by your IRS-provided life expectancy factor. But mistakes are common – and potentially costly. Here are some to avoid:

Forgetting to take your RMD or taking the wrong amount. This will subject you to a 50 percent penalty on whatever you miss. If you discover an error, the IRS may waive the penalty if you self-report it with an explanation and take the RMD you missed promptly. To determine your correct amount, make sure you use the right life expectancy table on the IRS website. For most individuals, it’s the Uniform Lifetime Table; the other two tables are for beneficiaries of retirement funds and account holders who have much younger spouses.

Not planning ahead. It may be tempting to take advantage of the first year’s grace period, which extends to April 1 of the year after you turn 70½, but that means you may have to take a double amount in one year. It may be wiser to start withdrawing from your tax-deferred accounts before you’re required to. Aside from tax implications, consider what assets should be taken out first. Hopefully, foresight will eliminate the need to sell stocks when prices are low.  

Failing to take an RMD from each 401(k) account you own. Although you can take an RMD from a single, traditional IRA to cover multiple IRA accounts, each 401(k) has to be calculated separately. That is one advantage of consolidating 401(k) accounts. You also can’t aggregate different types of accounts. For example, you can’t take your RMD for your 401(k) from an IRA. And you can’t combine RMDs for an IRA you own with an IRA you inherited or your spouse’s IRA.

Thinking RMDs must be spent. Since the percentage that RMDs are based on escalates with age, you may have to take more than you need for your expenses out of your tax-advantaged accounts. But that doesn’t mean you can’t reinvest the money in a taxable account.

Hope this info helps you make efficient decisions as it pertains to your 'Required Minimum Distributions'.  

Until Next Time.....

Darin

(We do not provide tax advice; coordinate with your tax advisor regarding your specific situation.)