Are you turning 73 this year? If you are, you will take your first requirement minimum distribution (RMD). Now is the perfect time to reflect on the process and make sure you're set up for success in 2025. If you are confused by the rules or worried about making a costly mistake, you're not alone! I will break down some common errors for you so you can keep your retirement plan on track.
What Are RMDs?
RMDs are the minimum amounts you must withdraw annually from your retirement accounts once you reach a certain age. The IRS uses these distributions to ensure they eventually collect taxes on pre-tax contributions and earnings. Starting in 2023, RMDs generally begin at age 73.
Let's take a look at some common missteps people make with RMDs and how to steer clear of them.
Mistake #1: Thinking One RMD Covers All Accounts
Scenario: You took your RMD from a 401(k) and assumed it satisfied the RMD for your IRA as well.
Reality: RMDs can't always be combined. For example:
- Traditional IRAs: You can aggregate RMDs. If you have two IRAs and both have a $1,000 RMD, you can withdraw $2,000 from one account to satisfy both.
- 401(k)s and Profit-Sharing Plans: You must take separate RMDs from each plan. These accounts cannot be aggregated with IRAs.
Pro Tip: Keep a checklist of your accounts and their RMD requirements to avoid missing one.
Mistake #2: Forgetting About Inherited IRAs
Scenario: You inherited an IRA, but the original account owner didn't take their RMD for the year. You assume you don't need to take it either.
Reality: If you inherit a traditional IRA, you must take any missed RMDs for the year on behalf of the deceased and pay taxes on that amount. This rule applies even if you plan to keep the funds in a beneficiary distribution account (BDA).
Pro Tip: If you share the inheritance with siblings, coordinate to ensure the decedent's RMD is satisfied without creating unnecessary complications for everyone.
Mistake #3: Rolling Over a 401(k) Without Taking the RMD
Scenario: You're retiring and plan to roll your 401(k) into an IRA, thinking you'll handle the RMD later.
Reality: You must take the RMD from your 401(k) before rolling over the remaining funds. If this step is skipped, you'll need to correct the issue by removing the excess RMD amount from the IRA later, which can get complicated.
Pro Tip: Double-check your 401(k) balance and confirm the RMD amount before initiating a rollover.
Mistake #4: Assuming SEP or SIMPLE IRAs Are Exempt While You're Working
Scenario: You're still employed and contributing to a SEP or SIMPLE IRA, so you think RMDs don't apply yet.
Reality: Unlike 401(k)s, SEP and SIMPLE IRAs require RMDs starting at age 73, even if you're still working.
Pro Tip: If you're contributing to these accounts and nearing RMD age, work with a financial advisor to plan your withdrawals effectively.
More Tips for Managing RMDs
- Set Reminders: Schedule your RMDs at the start of the year to avoid penalties.
- Work with a Professional: A financial advisor can help coordinate withdrawals and minimize taxes.
- Reinvest Wisely: Consider reinvesting RMDs into a taxable account to keep your money working for you.
Let's Make RMDs Simple
Navigating RMDs can feel overwhelming, but it doesn't have to be! I can help you develop a retirement strategy that fits your goals and helps ensure you meet IRS requirements. Schedule an introductory meeting to see how I can assist with retirement planning, tax-efficient withdrawals, and wealth management.
Jordan Hickey is a CERTIFIED FINANCIAL PLANNER® professional who helps clients create personalized financial plans. Based in Glastonbury and Wilton, CT, Jordan offers guidance on retirement, insurance, investments, and overall wealth management. Schedule a complimentary introductory meeting with Jordan.
This information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete, it is not a statement of all available data necessary for making an investment decision and it does not constitute a recommendation. RMD's are generally subject to federal income tax and may be subject to state taxes. Consult your tax advisor to assess your situation.
Raymond James and its advisors do not offer tax or legal advice.