You Make these Required Minimum Distribution mistakes too?

The drill for acquiring required minimum distribution (RMD) is very simple, for any retirement plan. As you turn 72 years of age, one must start withdrawing from any of the tax deferred accounts. Required minimum distribution means withdrawing an amount from your IRA, 401k or any other similar plans by the owners of the accounts after retirement age.

Here are some of the common mistakes that people tend to make with respect to their required minimum distributions.

1. Combining RMDs with spouse –

Most couples jointly own their finances. Though it’s true for most cases, retirement savings are accounted for by individuals.

So, if you and your spouse separately have $1000k in your accounts. You withdraw an amount as your rmd and think that it will suffice both of your needs for the year and you refrain your spouse from withdrawing. THIS IS NOT POSSIBLE! because you both are treated as separate individuals.

Also, not withdrawing from the retirement funds under the stipulated will attract a penalty of 50%.

2. Defaulting in taking your RMD at all –

This is because you will have to incur a 50% penalty on any part of the RMD that is not withdrawn. If this is a mistake you contact the IRS to take a look at what they can do about the situation.

3. Being late on your first RMD

It is mandatory for the retirement savings owners have to take their distributions by 31st December each year. But, in case of their first withdrawal, the IRS allows a delay to as late as 1st April following year. Though this arrangement has perks, it leaves the holder less than 12 months to withdraw his 2nd payment. 

If you have a large sum of amounts in your account, it will come with large RMDs too. Hence, you will have consecutive large withdrawals which are taxable. You will end up paying higher taxes.

In such a case, it is advisable to let go of the extensions and take the withdrawals over the period of two years.

4. Combining and Consolidating different RMDs –

As per the guidelines, if you have multiple IRAs or 403b accounts, you are allowed to consolidate them and take it as a single withdrawal. 

But this is not possible if you have multiple different types of accounts like an IRA along with 403b. Also, consolidation is not possible in 401k accounts.

You should also understand that withdrawing a certain amount of RMD meant for 1 account can be withdrawn from another.

5. Calculation Errors –

Making errors while calculating the RMDs is one of the common mistakes that you can make.

Most people calculate the wrong balance, you should use the balance of 31st December of previous year to calculate the RMD for next year.

6. Qualified charitable distributions

Every retirement savings has an option to earmark a certain amount to donate as charity. This helps you to save on taxes.

But one should be careful that earmarking of donations is not only limited to the RMDs but can extend all the savings in the account. 

7. Still working exceptions

As per the rules, if you are over 701/2 and have a 401k account and still working full time. You need not withdraw money from your account as a minimum distribution (refer #4).

Most individuals make a mistake of thinking it is similar  to IRAs as well. But one must note that this rule only applies to the plans offered to you by your current employer. If you have any multiple 401k, this rule will not be applicable there.

Also, one must note that if you retire on or before 20th December in years after you turn 701/2, you must withdraw your RMD.

8. No nullifying the withdrawals –

Many times individuals think that if they withdraw an excess amount over the prescribed RMD in one year, they can withdraw an amount after subtracting the excess for next year. It’s NOT POSSIBLE.

For example, if your RMD for a year is set as $6000 and you withdraw an additional $6000 for some other reasons. You cannot roll that over to next year. It means, you cannot argue that because you withdrew $12000 dollars in the previous year, you will refrain from making withdrawals in the current year.

Hence, the calculations for both the years are separate and cannot be merged.

9. Liquidity crunch –

Many times the individuals who manage their own 401ks or IRAs park their retirement investments in real estate or alternative investments. 

When the time comes to start the RMDs, liquidity is not available or the asset is not generating income. These concerns are not important for IRS and hence, we must be careful while making allocations in our portfolio.

10. Rolling over an RMD –

When you save the money in multiple accounts, generally there is an option of rolling it over to different accounts and consolidating it.

This is not possible with RMDs. You can do a lot with your withdrawal money but you cannot invest it back into you IRAs or 401ks

11. Different RMD rules for different types of accounts –

 If individuals have their accounts in different types of plans, sometimes they forget that rules for each are different from the others.

Like for example – If a person has multiple IRA accounts he can add up the balance and then factor the age and decide about withdrawals. He can essentially consolidate all withdrawals. But this is not possible in 401ks where you have to calculate RMDs separately for each account.

Also, you don’t have to take RMDs for Roth IRA accounts, though it is necessary to make withdrawals from Roth 401k accounts. These withdrawals won’t be taxed unless it is not a qualified withdrawal but it is important to be made.

12. Not having a long term plan –

RMDs are taxable and can have a great impact on our annual tax bills. Most people don’t realize this then regret later. Some planning is required to maintain the RMDs such that it won’t push you to the higher tax bracket. 

Along with this, there are numerous calculations that go in determining the appropriate RMD and failing to calculate properly can have consequences.

Hence, to save time and effort it would be great to take some assistance from the advisors to make most of your savings and not lose out on the opportunity.

These are some common mistakes that individuals make while planning or actually taking out their RMDs. After toiling all our lifetimes to save for retirement it’s not fair to lose it over some avoidable mistakes.. We should take utmost care while withdrawing our RMDs. Otherwise, you can lose a lot of your savings. 

Until next time!

Be Safe & Healthy,

Sunil Gangwani

Sneha Kotian

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