Avoid Required Minimum Distribution Mistakes

With everything happening in our world right now it could be easy to overlook certain things. But, if you are like many hardworking Americans who are approaching retirement or already retired, you may have a traditional IRA, SIMPLE IRA, SEP IRA, traditional 401k plan, 403b, or other type of tax-qualified deferred savings plan. I know these accounts may have taken a hit recently, but remember, that at a specific age you must still start taking Required Minimum Distributions(RMDs). After passing of the SECURE ACT in 2019, minimum distributions are now required to start when you reach age 72 and must continue on an annual basis as long as the tax-deferred account beneficiary is alive and/or there is money in the account. Required Minimum Distributions rules must be followed to prevent the IRS from imposing potential fines and penalties on IRA owners.

How the Required Minimum Distribution Is Calculated

When calculating a Required Minimum Distribution for any given year, it is always wise to confirm on the Internal Revenue Service’s website that you are using the latest RMD calculation tables. If you are still in the workforce at age 72, you may be able to delay Required Minimum Distributions from your most current employer’s retirement plan until after you separate service. But if you have other traditional IRAs or old employer plans still setting with former employers, you will have to go ahead and take the RMDs for those accounts beginning at age 72, regardless if you are still working or not. If you have a Roth IRA or ROTH 401k, a withdrawal is not required until the owner of the IRA dies.

Mistakes to Be Avoided When Taking RMDs

There are several mistakes that individuals with tax-deferred retirement accounts should avoid because they may potentially lead to expensive penalties and fines from the IRS. One common mistake made is not remembering that their RMD withdrawal is due! Some retirees that need to take RMD’s also make the mistake of not having a plan in place for the required withdrawals over the long term. This may lead to accidentally withdrawing the wrong amount, or none at all. We suggest that they work with an investment advisor to set these RMD calculations and withdrawals up to happen automatically each year. Remember, the responsibility of making sure the correct RMD is taken each year falls squarely on the shoulders of the account owner. Not the investment company, not their former employer, their advisor, or the IRS. Investment companies and investment firms often offer to assist their clients with their RMDs, but they have no responsibility to do so. If this service is offered, it is purely as a courtesy to the IRA or retirement account beneficiary.

The Consequences of Making Mistakes with RMDs

There can potentially be consequences when mistakes are made in regard to RMD’s. For example, if you forget to take a RMD, or take the incorrect(too small of an) amount, the fine is 50 percent of the amount that should have been withdrawn, plus the income tax that would be due on the amount not taken. In many instances these are the type of mistakes that may be able to be avoided by working with someone who understands RMDs and how they fit into one’s financial plan. A qualified financial professional should be able to assist you in calculating the correct amount(s) to withdrawal so as to avoid potential penalties. It is also important to note that RMD amounts, in some instances may be aggregated for withdrawal purposes out of specific types of accounts. Therefore, working with someone who understands how these types of strategies may be beneficial to your overall financial planning may be key to long-term retirement success.

There is a lot to think about when it comes to planning for retirement. We are here to help serve as a steward for you and your family’s resources. We believe that having a financial plan is now more important than ever.

*Material presented is not intended as tax advice. For specific tax advice, please contact your own qualified tax professional.