Don’t fall into the same trap.
Saving for retirement in a traditional IRA or 401(k) has its benefits. The fact that your contributions are tax-free could make them easier on you financially during the period when you’re trying to build up retirement wealth.
But there’s a downside to saving in a traditional retirement plan. Not only will your withdrawal be taxed during retirement, but at some point, you’ll be forced to take required minimum distributions, or RMDs. And that could open the door to a world of trouble. Here are some RMD mistakes retirees commonly make — and how to get around them.
1. Missing the deadline for your first RMD
The rules of RMD deadlines can be confusing when you’re first on the hook to take them. See, normally, RMDs are due by the end of the calendar year. So as long as that money comes out of your IRA or 401(k) plan by December 31, you’re all set.
But your first RMD is due April 1 of the year after you turn 73, assuming you were born before 1960. And because that’s not the typical RMD deadline of December 31, you risk forgetting about it.
But it’s important to know when your RMDs are due to avoid costly penalties. And remember, if you take your RMD between January 1 and April 1 the year after you turn 73, you’ll actually be on the hook for two RMDs that year, with the second one being due December 31. You may want to work with an accountant or financial professional to time your RMDs accordingly when you’re first getting started with them.
2. Forgetting about qualified charitable distributions
The problem with RMDs is that they have the potential to increase your tax burden. But the impact can go beyond that.
Your RMDs count as taxable income. And having to withdraw that money could put you in a position where you face other costs, like taxes on your Social Security benefits or surcharges on your Medicare Part B premiums known as income-related monthly adjustment amounts (IRMAAs).
But there is one thing you can do to avoid that tax hit. If you arrange for a qualified charitable distribution (QCD) from your IRA or 401(k), you can satisfy your RMD and avoid increasing your personal tax liability. The only thing you need to know is that QCDs max out at a certain level each year. In 2024, it’s $105,000.
3. Assuming you need to spend the money
You have to remove funds from your IRA or 401(k) to fulfill your RMD. But that doesn’t obligate you to go out and spend that money.
If you don’t need it all, you can put it into a savings account where it earns interest or use it to set up a CD ladder. Or, you could invest it in a taxable brokerage account.
You have plenty of options, and you shouldn’t assume that you can’t put that money back into some type of account or asset that’s earmarked for savings. It just can’t be a tax-advantaged account like an IRA or 401(k).
RMDs could negatively impact your retirement finances — but they don’t have to. Keep these blunders on your radar so you don’t end up falling victim to them.
