Required minimum distributions (RMDs) are mandatory annual distributions the government requires you to take from most retirement accounts beginning in the year you turn 73. It does this to get its piece of your savings after giving you a tax break on your contributions years earlier.
RMDs can be confusing, especially if you're new to them. You need to be careful not to make the following three mistakes to avoid costly tax penalties.
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1. Not taking your RMDs as scheduled
The biggest mistake you can make is not taking your RMDs as you're supposed to. Typically, you must take your RMDs by Dec. 31, but you have until April 1 of the following year to take your first RMD. So, if you turned 73 in 2024, you have until April 1, 2025, to make your 2024 RMD. However, if you haven't done yours yet, you'll have to take two RMDs -- one for 2024 and one for 2025 -- this year.
You don't have to take RMDs from Roth retirement accounts or from any 401(k) if you're still working for that employer and own less than 5% of the company. In the latter case, your RMDs from this account begin in the year after you quit your job.
Calculating RMDs isn't too complicated. You take your account balance at the end of the previous year -- 2023 for your 2024 RMD -- and divide it by the distribution period next to your age in the Uniform Lifetime Table. For example, if you're 75 with a $100,000 IRA balance, you'd divide $100,000 by the 24.6 distribution period for 75-year-olds to get an RMD of $4,065.
You can lump all your IRA RMDs together if you'd like. For example, if you have to take a $4,000 RMD from one IRA and a $6,000 RMD from another RMD, you can take $10,000 from one, $5,000 from each, or any combination you want as long as you withdraw at least $10,000.
This isn't the case for 401(k)s, though. You must take an RMD from each 401(k) in your name individually. If you'd like to minimize the number of 401(k) RMDs you have to take in future years, consider rolling one or more of them into a more recent 401(k) or into an IRA.
2. Not acting promptly if you miss an RMD
The IRS assesses a 25% tax penalty on any RMD you fail to take. So if you were supposed to take $10,000 out of your accounts and you didn't withdraw any, you'd owe the IRS $2,500 as a penalty. That's probably more than you'd have paid in income taxes if you'd taken your RMD as scheduled.
But if you accidentally forget to take your RMD, you have a chance to reduce that penalty by acting promptly. If you take your RMD as soon as you realize your mistake and file an amended tax return with the IRS within two years, it'll drop the penalty to 10%. It's still not ideal, but in our example above, it would save you $1,500 in penalty taxes.
3. Misunderstanding the qualified charitable distribution (QCD) rules
Qualified charitable distributions (QCDs) are the only way around RMDs if you're required to take them. This is where you donate your RMD to a qualifying charitable organization. You'll still have to withdraw the money, but the IRS won't include it in your taxable income for the year.
The key rule for QCDs, apart from meeting the RMD deadline, is that the money can't pass through your hands first. If you withdraw the funds yourself and then donate them to the charity, you may be able to write this off as an itemized deduction on your return. But it won't count as a QCD.
A true QCD requires you to notify your retirement plan administrator of where you want the funds sent so it can transfer them for you. It's best not to wait until close to the tax deadline to do this, as it may take a few days for your funds to transfer.
If you have any questions about RMDs or QCDs, it's best to reach out to a tax professional in your area who can provide you with personalized guidance.
