5 Year-End RMD Mistakes to Avoid
If you are approaching age 70 ½, now is the time to calculate your Required Minimum Distributions (RMDs) for all your retirement accounts to avoid paying a 50% penalty for missing those distributions. First and foremost, it is important to make sure you have a complete inventory on all accounts subject to RMDs, including any inherited IRAs, which are also subject to RMDs and are often missed.
Below are 5 additional mistakes to avoid:
- First-year RMD confusion: RMDs begin for the year you turn 70 ½ and a common mistake is using the wrong balance for the first RMD. Tip: Use the December 31 balance of the year before the first required distribution year, even if the actual RMD is not taken in that year. By law, you have until April 1 of the next year to take your first RMD.
- Aggregation Errors: It is important to make sure to take RMDs from the right plans or IRAs. You cannot satisfy an IRA RMD from a 401(k) and vice versa. However, IRAs have a special aggregation rule that allows RMDs from IRAs to be taken from any one or combination of those IRAs. This rule does not, however, apply to inherited IRAs. In addition, a husband and wife who each have IRAs and are subject to RMDs must take those RMDs separately from their own accounts, even though the total RMD for both will be reported on the same joint tax return.
- “Still Working” exception mistakes: This exception only applies to the working employee delaying taking the RMD from the current company’s plan until the year after they retire and DOES NOT apply to all other IRAs or other plans.
- Inherited Roth IRAs: While there are no lifetime RMDs for your own Roth IRAs, inherited Roth IRAs are subject to RMDs and to the 50% penalty, even if the RMD would be tax-free.
- Year-of-death RMDs: If you inherit an account and the decedent did not take their entire RMD for that year, the beneficiary of that account is responsible to take the RMD based on the amount the decedent would have been required to withdraw.
Required Minimum Distributions can be challenging to decipher, especially if it is your first year taking them. If this is new to you and you have questions, you’re welcome to give our office a call (775) 853-9033.