One Small Mistake with Your RMDs Could Cost You Thousands. Are You Confident You’re Doing It Right?

Introduction: The Hidden Risk in Your Retirement Plan

In this blog, we’ll break down everything you need to know to avoid costly RMD errors, explain how the rules have evolved, and give you actionable tips to stay compliant and optimized.

The purpose? To ensure that tax-deferred retirement savings eventually get taxed.

Failing to take your RMD results in a hefty penalty. As of 2023, the excise tax is 25% of the amount you should have withdrawn—but this can be reduced to 10% if corrected in a timely manner. Still, that’s money most retirees can’t afford to lose.

1. Missing the Deadline: RMDs must be taken by December 31 each year (except for your first RMD, which can be delayed to April 1 of the following year).
2. Incorrect Calculations: Your RMD is based on your account balance as of December 31 of the previous year and your IRS life expectancy factor. Using the wrong table or not updating your account values can skew results.
3. Taking RMDs from the Wrong Accounts: If you have multiple IRAs, you can aggregate RMDs, but that doesn’t apply to 401(k)s.
4. Forgetting Inherited Accounts: Inherited IRAs or 401(k)s have their own RMD rules. Missing one can still result in penalties.
5. Reinvesting in a Tax-Deferred Account: Once you take an RMD, you can’t put it back into a traditional IRA—it must go into a taxable or Roth account (if eligible).

• Delayed RMD Age: The starting age moved from 72 to 73 in 2023 and will increase to 75 by 2033.
• Reduced Penalties: The penalty for missed RMDs was lowered from 50% to 25%, and potentially to 10% if corrected within two years.
• Employer Plan Flexibility: Certain Roth 401(k)s are now exempt from RMDs.

1. Roth Conversions: Gradually converting traditional IRA funds to a Roth before RMD age can reduce your future RMDs and overall tax burden.
2. Qualified Charitable Distributions (QCDs): Donating up to $100,000 directly to charity from your IRA (after age 70½) counts toward your RMD and avoids income tax.
3. Account Consolidation: Having fewer retirement accounts makes calculating and tracking RMDs easier and more accurate.
4. Timing Your First RMD: If you delay your first RMD until April 1 of the following year, you’ll have to take two RMDs in one year—potentially increasing your taxable income. Plan accordingly.

Example: If you’re 75 and your IRA balance is $500,000, and your factor is 22.9, your RMD would be:

$500,000 / 22.9 = $21,834.06