3 Big RMD Mistakes You Risk Making in Retirement

If you have your retirement savings in a traditional IRA or 401(k), you won't always have complete control over how you withdraw that money. Once you turn 73 or 75, depending on your year of birth, you'll have to start taking required minimum distributions (RMDs).

It's important to understand how RMDs work. And part of that means avoiding these big RMD mistakes.

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1. Botching your timing

RMDs are due each year by Dec. 31. That's pretty simple. What may get confusing is that you're allowed to defer your first RMD to April 1 of the year following the year those withdrawals become mandatory.

However, if you delay your first RMD, you'll have to take two RMDs the following year. Your April RMD will fulfill the previous year's RMD, so you'll still have to take a second one by Dec. 31 to avoid being penalized.

As a reminder, RMDs you don't take in time are subject to a 25% penalty. That could amount to a large sum if you have a sizable IRA or 401(k). So it's important to know when RMDs are due, especially if you're deferring your first one.

2. Assuming you have to spend the money

One big misconception about RMDs is that the money you withdraw from your IRA or 401(k) must be spent. Once that money is out of your account, you can do whatever you want with it. All the IRS cares about is taxing your withdrawal.

If you don't need your RMD, don't spend it. Instead, invest it in a taxable brokerage account, open a CD, or stick the money into a high-yield savings accounts. All of these options allow your money to grow, albeit without a tax break.

3. Doing a massive Roth conversion in a single year to get out of RMDs

If you don't want to be subject to RMDs in retirement, you can potentially get out of them by converting your traditional retirement account to a Roth. But one thing you don't want to do is a huge Roth conversion at once.

When you do a Roth conversion, the money you move over counts as taxable income that year. A giant conversion could bump you into a very high tax bracket. And it could have other consequences, too.

If you're on Medicare, for example, and you do a Roth conversion worth hundreds of thousands of dollars, you could end up being charged hundreds more for your Part B premiums each month two years later.

A better bet is to gradually convert traditional retirement savings to a Roth. The more years you give yourself, the better.

RMDs can be a pain, but falling victim to these mistakes could make things even worse. Read up on how RMDs work ahead of retirement so you know what to expect. And if you intend to do a Roth conversion, make sure to time it strategically to minimize the tax hit.

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