Don't Make This Common IRA Mistake That Could Cost You Thousands

Saving for retirement can be more complicated than you'd think. On top of figuring out how much you can afford to save each month, you also need to find the right home for your retirement nest egg.

For many people, a traditional IRA might read like the best choice in that regard. You can fund an IRA as long as you have earned income.

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Self-employed? Not a problem. IRAs were made for people like you.

But if you're going to save for retirement in an IRA, there's one important thing you'll need to plan for. And failing to do so could cost you.

Don't forget about RMDs

If you keep your retirement nest egg in a traditional IRA, you'll eventually have to start taking required minimum distributions, or RMDs, starting at age 73 or 75 (it depends on your year of birth).

RMDs are calculated each year based on your IRA balance and life expectancy. And if you don't take yours on time, it could cost you.

The penalty for not taking an RMD on time is 25% of the amount you're supposed to withdraw from your IRA but don't. And if that sounds like a lot, you should know that the penalty used to be 50% but was lowered to 25% pretty recently.

Now if you miss a small RMD, the financial hit may not be so terrible. A $300 skipped RMD, for example, will cost you $75.

But if you have a $30,000 RMD, missing the deadline could cost you $7,500. So it's very important to understand when RMDs are due, and to plan for them ahead of time.

How to avoid RMD penalties

Depending on the size of your RMD, missing it could cost you thousands. So if you have a traditional IRA, it's important to know when RMDs start and what their deadlines look like.

If you were born prior to 1960, RMDs begin at age 73. If you were born in 1960 or later, they start at 75.

From there, all RMDs are due by Dec. 31 each year. However, you can delay your first RMD to April 1 of the year after your 73rd or 75th birthday.

If you want to avoid RMD penalties, make sure to arrange for the appropriate amount of money to come out of your IRA each year. A good bet, in fact, is to see if your financial institution allows you to automate RMDs (many do). From there, you can find a schedule that works for you, whether it's monthly, quarterly, or annually.

Forgetting about RMDs is one of the most expensive IRA mistakes you might make. Learn the rules and plan ahead for those mandatory withdrawals so you don't end up getting hit with a penalty that makes you want to scream.

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