Are You Making These 4 Common Required Minimum Distribution (RMD) Mistakes?

Key Points

• RMDs are due when you reach age 73 (or 75, if you were born in 1960 or later).

• Failure to take your RMD by the deadline could lead to an excise tax of 25%.

• Still working? Be sure to find out if you qualify for the still-working exception.

• The $23,760 Social Security bonus most retirees completely overlook ›

A required minimum distribution is the amount of money you must withdraw from your retirement account by April 1 of the year following the year you turn 73 (or 75, if you were born in 1960 or later). Even if you would prefer to allow the entirety of your retirement account to continue to grow or don't need the money to pay bills, you're required to take it. Failure to do so can lead to a penalty of 25% on the amount that should have been withdrawn.

Like most things, it may take a little time to familiarize yourself with RMDs. However, the more practice you have, the easier it will become. Still, it's easy to make a mistake inadvertently. Here are four of the most common.

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1. Being unsure of whether RMDs apply to your retirement plan

If you have a Roth IRA, you may be aware that it's not subject to RMDs (unless you inherited it). However, if you hold any of the following account types, RMD rules do apply:

• Traditional IRA
• SEP IRA
• SIMPLE IRA
• 401(k) plan
• 403(b) plan
• 457(b) plan
• Profit-sharing plan
• Other defined contribution plan

2. Having insufficient funds to cover your RMD

While publicly traded assets can typically be quickly liquidated, the same cannot be said of non-publicly traded assets. Non-publicly traded assets may take months to liquidate due, in part, to how difficult it can be to assign an accurate value to a non-publicly traded asset. This hiccup in the system could cause you to miss an RMD deadline, even if you believe the process started with plenty of time.

While this list is not exhaustive, it does provide a sample of investments that may take longer than expected to liquidate:

• Stock, or other ownership in a corporation with short- or long-term debt obligations, but not traded on an established securities market
• Ownership interest in a limited liability company or similar entity not traded on an established securities market
• Option contracts that are not offered for trade on an established option exchange
• Real estate

If your retirement account holds such assets, ensure you have other suitable assets available or enough cash to meet your RMD obligations.

3. Combining your RMDs with a spouse's

If you're married and file taxes jointly, it's natural to assume you can also combine your RMDs. However, you're each responsible for your own RMDs. RMDs are calculated based on your age and the balance of your retirement accounts, meaning each spouse must satisfy RMD requirements separately.

Let's say one of you has a much larger account balance than the other, and you'd like to withdraw enough from the account with the larger balance to fulfill both of your RMDs. It is not permissible and will likely result in a penalty for the spouse whose account was untouched.

You can avoid this common mistake by ensuring you each focus on your individual RMDs.

4. Failure to take advantage of the "still-working" exception

Imagine you're 75 and continue to work for the same company you've been with for 50 years. Although most people your age must take RMDs, you may be able to postpone doing so. You're eligible for the still-working exception if you meet the following criteria:

• You're actively employed by the business that sponsors your retirement plan
• You don't own more than 5% of the business
• Your plan has formally elected to include the still-working exception

Check with the plan administrator if you're unsure whether your company plan includes the still-working exception.

If you're concerned about missing an RMD deadline or getting your calculations wrong, check out the tools offered by your brokerage or financial institutions. These tools can be helpful. They allow you to set up recurring withdrawals on a schedule that works for you and ensure you never miss a deadline.

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