When you work hard to save for retirement, you want to make the most of your money. Unfortunately, many seniors aren't doing that. Instead, far too many retirees are wasting some of the funds they put into their retirement plans by sending it to the IRS to pay penalties instead.
A simple retirement mistake is causing this undesirable outcome, but the mistake has big consequences, as the error costs seniors an estimated $1.7 billion annually, according to Vanguard. Here's what the error is, along with some details on why so many retirees are falling victim to it.
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Retirees are making a big mistake with their RMDs
The huge mistake many retirees are making involves their required minimum distributions (RMDs).
RMDs are mandatory for certain tax-advantaged accounts, including traditional IRAs, SEP and SIMPLE IRAs, and 401(k)s. Under the SECURE 2.0 Act, if you were born between 1951 and 1959, you'll have to start your RMDs at 73, while you'll start them at 75 if you were born in 1960 or later.
The penalty for not taking RMDs can be pretty substantial -- 25% of the amount that you should have withdrawn but that you failed to withdraw. This can be reduced to 10% if you fix the error in a timely manner (typically within two years) or can be waived if you can show you didn't take your RMDs due to a genuine mistake that you've taken reasonable steps to remedy.
Unfortunately, Vanguard's research found that almost 7% of its traditional IRA investors missed their RMDs in 2024. Those who made this error ended up incurring average tax penalties topping $1,100.
How can you avoid RMD mistakes?
You can't afford to make these mistakes if you want to make the most of the money in your retirement plans, so be sure to:
- Understand when RMDs are required based on your age
- Use the IRS tables and worksheets to determine your required withdrawal amount or work with an IRA account provider that notifies you of your RMD amount
- Withdraw the correct amount from your account each year
You may also want to consider a Roth conversion, since RMDs aren't required from Roth IRAs -- but be aware that this can have tax consequences, so you should consider talking with an advisor first to find out if that's the right approach for you.
