Retirees, Don't Make This Costly RMD Mistake

When you're in the process of building retirement wealth, it's important to choose a home for your savings carefully. And that may mean choosing between a traditional retirement account versus a Roth.

The upside of traditional IRAs and 401(k)s is that your money is contributed on a pre-tax basis, allowing you to shield income from the IRS. Roth IRAs and 401(k)s, on the other hand, are funded on an after-tax basis, so there's no immediate IRS benefit to enjoy.

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But Roth retirement accounts offer a major benefit in retirement in addition to tax-free withdrawals -- they don't force savers to take required minimum distributions (RMDs). If you don't have your savings in a Roth account, you'll need to start thinking about RMDs once you're 73 years old.

The problem with RMDs is that they can trigger a huge tax bill. But failing to take an RMD on time can result in a costly 25% tax penalty. So it's in your best interest not to miss your RMD deadlines. Here's how to avoid an unnecessary financial hit.

Automating RMDs may be your best bet

RMDs are due each year by Dec. 31. If it's your first RMD, however, you're allowed to postpone it until April 1 of the year after you turn 73. If you do that, you'll have two RMDs to take in a single year -- and two deadlines to remember.

Because there's such a steep penalty associated with missing an RMD deadline, it's important not to forget. And the best way to do that is to automate those withdrawals.

Most financial institutions these days allow you to set up automatic RMDs. You can generally choose to have your RMD paid out as a single lump sum or in monthly or quarterly installments.

Now as you may be aware, your RMD amount can change over time. But when you set up automatic RMDs, your financial institution will generally recalculate the amount you have to withdraw each year to ensure that the right amount of money is coming out of your account. You can generally also arrange to have taxes withheld from your RMDs when setting up automatic withdrawals.

A move worth making

It's silly to lose 25% of your RMD due to forgetting to take a withdrawal or getting busy and missing the deadline. Putting the process on autopilot could be a huge money-saver for you, and it could also spare you the stress of having to actively arrange for RMDs each year yourself.

Now if you're worried about taxes, there are strategies you can employ to reduce the tax hit RMDs might cause. It's generally a good idea to speak to a tax professional or financial advisor to explore your options and choose the one that makes the most sense for your situation.

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