Biggest RMD Mistake
If you’re approaching age 73 or already taking withdrawals from your retirement accounts, understanding Required Minimum Distributions (RMDs) is essential. These mandatory withdrawals from traditional IRAs, 401(k)s, and other tax-deferred retirement accounts are governed by IRS rules. While there are several common missteps, one stands out as the biggest and most costly RMD mistake: missing your RMD deadline.
Missing the Deadline: A Costly Oversight
The IRS requires that RMDs be taken by December 31 each year, starting the year you turn age 73 (or age 75 if you were born in 1960 or later, per the SECURE 2.0 Act). If you fail to withdraw the correct amount by the deadline, the IRS may impose a penalty of up to 25% of the RMD amount you failed to take.
This penalty can be reduced to 10% if the mistake is corrected in a timely manner and you file Form 5329, but it’s still one of the harshest penalties in the tax code.
For example, if your RMD was $20,000 and you forgot to take it, the IRS could fine you $5,000—a preventable loss.
Why It Happens
Missing an RMD is more common than you might think. Reasons include:
- Unfamiliarity with the rules, especially during the first year RMDs are required
- Having multiple accounts, making it harder to track total RMD obligations
- Believing Roth IRAs have RMDs (they don’t—for the original account holder)
- Assuming your financial institution will remind you (many don’t)
In your first RMD year, you have until April 1 of the following year to take the withdrawal. But this exception only applies once. Starting the second year, the RMD deadline becomes December 31 every year.
How to Avoid This Mistake
- Set annual reminders well before year-end
- Use a reliable RMD calculator based on the latest IRS life expectancy tables
- Work with a financial advisor or tax professional to ensure all accounts are covered
- Consider consolidating retirement accounts to simplify your RMD tracking
Final Thought
The biggest RMD mistake—missing your withdrawal deadline—can be both costly and unnecessary. With proper planning, accurate tools, and timely action, you can easily avoid this penalty and keep your retirement strategy on track.
If you require expert assistance, the dedicated team of Dimov Tax is ready to aid. Contact us today for professional RMD services.