Key Points
If you have money in a traditional IRA or 401(k), required minimum distributions, or RMDs, are a reality you’ll face once you turn 73 or 75, depending on your year of birth. But it’s important to know how RMDs work and how to minimize the potential tax hit they can cause.
Some people cause themselves needless stress in retirement because they don’t manage RMDs properly. You don’t want to be one of them, so try your best to avoid these RMD mistakes.
1. Missing your RMD deadline
The penalty for failing to take an RMD on time used to be 50% of the sum you didn’t withdraw. More recently, that penalty was reduced to 25% as part of the SECURE 2.0 Act.
But it’s still a large penalty you probably don’t want to face. That’s why missing your RMD deadline is a mistake you might kick yourself for.
RMDs are due each year by Dec. 31. If you wait until the very end of the year to take your RMDs, you might get caught up in the holidays (or a snowstorm — you never know) and just plain forget.
A better bet? Set a calendar reminder for earlier in the year or arrange for your RMD to happen automatically. Most financial institutions make it easy to put RMDs on autopilot.
2. Delaying your first RMD
You’re allowed to defer your first RMD to April 1 of the year after you turn 73 or 75. But that comes with a catch.
If you postpone your first RMD, you’ll still need to take your second RMD by Dec. 31 of that same year. That means you’ll end up taking two taxable distributions in one calendar year.
Having to double up on withdrawals could push you into a higher tax bracket. It could also result in other consequences, like having to pay taxes on your Social Security benefits or being assessed Medicare surcharges known as IRMAAs, or income-related monthly adjustment amounts.
Before postponing your first RMD, estimate what your taxable income will look like under both scenarios. You may find that taking the first distribution during your initial RMD year results in a lower tax bill overall.
3. Forgetting about qualified charitable distributions
If you regularly donate to charity, qualified charitable distributions (QCDs) could significantly reduce your taxable income. With a QCD, money goes from your IRA to a registered charity. That donation can satisfy your RMD without increasing your taxable income.
If you’re taking RMDs and then writing checks to charity with that money, you’re not maximizing your tax breaks. Remember, charitable deductions really only help if you’re itemizing on your taxes. A QCD gives you a tax break regardless of whether you take the standard deduction or itemize.
RMDs may be unavoidable if you have money in a traditional retirement account. Planning carefully for deadlines, timing your first distribution strategically, and taking advantage of strategies like QCDs could help reduce your taxes and keep more of your retirement savings working for you.
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