Think You Can Ignore RMDs? Here's What It Could Cost You.

If you save for your senior years in a traditional retirement account, you won't have complete control over your money later in life. Once you turn 73 (or 75, depending on your year of birth), you'll have to start taking mandatory withdrawals known as required minimum distributions (RMDs).

If you're getting close to that point and are thinking you'll just ignore your RMDs, you may want to come up with a different plan. Blowing off your RMDs could prove to be a costly mistake.

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Watch out for steep penalties

With a traditional individual retirement account (IRA) or 401(k), you get a tax break on your contributions. The IRS wants to get a chance to tax that money eventually, which is why it imposes RMDs.

RMDs are due every year by Dec. 31. If you don't take an RMD on time, you could face a 25% penalty on whatever sum you don't remove from your savings.

Now, if you have a small IRA with a $2,000 RMD, failing to take it means facing a $500 penalty. It's not a great thing to lose money, period, but a $500 penalty is one you may be able to recover from pretty easily.

If you're on the hook for a $40,000 RMD, though, then failing to take it on time could mean getting penalized $10,000. If you have a $100,000 RMD, not taking it could mean losing $25,000 to the IRS.

For this reason, ignoring RMDs isn't smart. But that doesn't mean you can't lessen the blow.

How to reduce the pain of RMDs

RMDs can trigger a potentially large tax bill, as well as other consequences. If they cause a big increase in your income, you could face taxes on Social Security benefits and surcharges on your Medicare premiums.

The good news is that there are steps you can take to reduce the blow of RMDs. One option is to do qualified charitable distributions, or QCDs. These allow you to send money from your retirement account directly to a qualifying charity, allowing you to avoid taxes.

QCDs can be done only from an IRA, not a 401(k). If you have a 401(k) plan, though, you should be able to roll that money into an IRA to allow for QCDs.

You can also look at doing Roth conversions ahead of retirement to get out of RMDs completely. Say you have $500,000 in a traditional retirement account, and you retire at age 63 and start living off of Social Security and wages from a part-time job.

In that scenario, you may be in a pretty low tax bracket. And you have 10 years before RMDs begin.

You could, at that point, convert $50,000 a year of your savings to a Roth IRA. You'll raise your tax bill each year, but you may not push yourself into an unreasonably high tax bracket if you space those conversions out.

As much as RMDs can be a thorn in your side, ignoring them could only make things worse. Rather than risk a penalty, find ways to make RMDs less of a problem -- or do a conversion that lets you off the hook completely.

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