Required minimum distributions (RMDs), mandatory withdrawals from tax-deferred accounts, are a way for Uncle Sam to recoup some tax money after giving you an upfront tax break in the form of tax deductions. These RMDs kick in the year in which you turn 73 and remain in place for the rest of your life or until there's no money left in relevant accounts, like 401(k)s or traditional IRAs.
The RMD process isn't always understood. Here are three common RMD mistakes to avoid that can save you money and headaches.
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1. Missing the deadline
The most common RMD mistake is simply not taking the RMD. With the exception of your first year, you're required to take your RMDs by Dec. 31 each year.
If you miss your RMD, you'll face a 25% penalty on the amount you didn't withdraw but were supposed to. For example, if you were supposed to withdraw $40,000 but only withdrew $10,000, your penalty would be $7,500 (25% of the remaining $30,000).
If you take the appropriate RMD within two years of missing the deadline, the penalty can be reduced to 10%. To get the penalty reduced, you'll need to take the withdrawal and then file IRS Form 5329 with your next tax return.
2. Not knowing your first RMD can stack up
In the year you turn 73, you'll have the option to delay your RMD until April 1 of the following year. For instance, if you'll turn 73 in 2026, you'll have until April 1, 2027 to take your RMD. If you'll turn 73 in 2027, you'll have until April 1, 2028.
If you choose to delay your first RMD into the following year, you'll also need to take the other RMD that's required for that year. For example, if you delayed taking your 2026 RMD until 2027, you'll still need to take 2027's RMD by Dec. 31, 2027.
Having to double up on RMDs means more taxable income, which can potentially increase your tax bill. Therefore, it's important to consider if it's a smart move for your personal situation.
3. Treating all your accounts the same
If you have more than one traditional IRA, taking an RMD from a single account will count toward the total amount you need to withdraw from all your IRAs combined. For example, if you have three traditional IRAs with RMDs of $2,000, $3,000, and $5,000, withdrawing $10,000 from just one account will do the trick.
With your 401(k) accounts, you must take the respective RMD from each individual account. If you have three accounts with $5,000, $10,000, and $20,000 RMDs, you'll need to withdraw $5,000 from one, $10,000 from the other, and $20,000 from the third.
It's also important to note that withdrawals from traditional IRAs won't count toward your 401(k) RMD obligations, and vice versa.
