Are You Making These 5 Common Required Minimum Distribution (RMD) Mistakes?

You spend years making pre-tax contributions to your retirement plan, but once you hit a specific age, the government would like you to pay taxes on that money. They do this through required minimum distributions (RMDs).

Even though anyone with a traditional IRA, Rollover IRA, SEP IRA, SIMPLE IRA, or most 401(k) and 403(b) plans must take RMDs, there's still some confusion around the process. Here are the answers to questions you may have.

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1. Forgetting to make a required withdrawal

For the most recent retirees, RMDs must begin by age 73. For those born in 1960 or later, the age is 75. Whether it's your first required withdrawal or you've been taking them for years, failure to do so can be an expensive mistake. According to the IRS, if you fail to withdraw the full amount of the RMD by the due date, the amount not withdrawn may be subject to an excise tax of 25% (that penalty may be dropped to 10% if you correct the issue within two years).

For example, if you're supposed to withdraw $10,000, but only take $5,000, you could be hit with a penalty of $1,250 on the $5,000 not withdrawn.

2. Failing to have a withdrawal strategy that factors in market conditions

There's no single way you must take your RMDs. For example, you make a single annual withdrawal, a quarterly withdrawal, or a monthly withdrawal. It's up to you. However, one thing to consider when you withdraw is this: You don't know what the market is about to do.

Let's say you take an annual withdrawal in January and within weeks, market values hit the stratosphere. If you'd taken a smaller quarterly or monthly withdrawal, you could have left more of your money in your account to buy high-quality assets at a discount and grow at a higher-than-average rate.

On the other hand, imagine that the market tanks in the weeks leading up to your annual withdrawal. Unless you have a cash or cash equivalent account to draw the money you need, you'll have to sell a larger portion of your assets to net the money you need from the account.

3. Incorrectly calculating the RMD amount

Your RMD is calculated for each account by dividing the prior December 31 balance by a life expectancy factor published by the IRS. Getting it "just right" may feel intimidating for some. An IRA custodian or retirement plan administrator may calculate the RMD on your behalf, but you're ultimately responsible for ensuring it's the correct amount.

If the miscalculation leads to you withdrawing less than necessary, it could trigger a penalty.

4. Missing out on an easy RMD reduction

If you're married and your spouse is 10 years (or more) younger than you, you could reduce your RMD by using the Joint Life and Last Survivor Expectancy Table. To land this reduction, you must meet the following criteria:

• Your spouse must be the sole primary beneficiary of the entire account for the entire year.
• Your spouse must be 10 or more years younger than you.

5. Delaying your first RMD

The IRS allows you to defer your first RMD to April 1 of the year following your 73rd (or 75th) birthday. While that may seem like the IRS is giving you a break, delaying the distribution may not be your best bet. That's because even if you take your first RMD on April 1, another RMD will be due by December 31 -- a fact that could lead to higher taxes that year.

Unless you have a good reason to delay, consider taking that first distribution in the year you hit the targeted RMD age.

While it's easy to understand why Uncle Sam may want his piece of pie, taking regular withdrawals can get complicated if you don't have a withdrawal strategy that works for you. If you haven't already done so, now would be a good time to commit to a strategy.

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