Your RMD Could Cost You Thousands If You Miss This Deadline
Key Points
Required minimum distributions (RMDs) have a strict deadline every year.
Failing to take you withdrawal on time could result in a whopping penalty.
There's an easy way to avoid that unwanted consequence.
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If you have your retirement savings in a traditional IRA or 401(k), you may be aware that you can't just leave that money growing forever. You'll have to start taking required minimum distributions, or RMDs, from your account once you turn 73 or 75, depending on your year of birth.
Missing a key RMD deadlines could have major consequences, though. It's important to understand what happens if you don't take your RMD on time and how to avoid being late.
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You don't want to get hit with a massive penalty
RMDs exist for a key reason. When you contribute to a traditional IRA or 401(k) plan, your money goes in on a pre-tax basis. The IRS eventually wants the opportunity to tax that money, so it forces savers to take mandatory withdrawals from traditional IRAs and 401(k)s during retirement.
RMDs are due each year by Dec. 31. They're calculated annually based on your retirement account balance and life expectancy.
You're allowed to delay your first RMD to April 1 of the year after you turn 73 (or 75). But otherwise, the only RMD deadline you need to know is Dec. 31. Take your withdrawal by then, and you're in good shape.
But the cost of missing an RMD deadline is huge. You'll typically face a penalty of 25% of the amount you fail to withdraw. For a $30,000 RMD, that's $7,500 you're basically handing over to the IRS and saying, "Here, take this money off my hands."
Now, if you correct a missed RMD quickly, you can often get that penalty reduced to 10%. But that could still be a lot of money, depending on the size of your RMD. For a $30,000 withdrawal, that's giving up $3,000 of your savings, which could still hurt.
An easy way to avoid missed RMD deadlines
Since failing to take your RMDs on time can result in penalties, it's a good idea to automate your withdrawals. If you put them on autopilot, you can avoid missing deadlines because of factors such as getting busy, falling ill, or other disruptions.
Most financial institutions let you automate RMDs, and you can often choose a frequency that works for you. You may, for example, want to get your money monthly, quarterly, or just once a year.
Either way, though, make sure you're taking those RMDs on time. Otherwise, you risk handing money over to the IRS that really should be yours to keep.
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