3 of the Costliest RMD Mistakes Retirees Make -- and How to Avoid Them
These could deal your retirement finances a blow.
By Maurie Backman
Saving for retirement in a traditional IRA or 401(k) offers a lot of perks. But there's a big drawback -- having to eventually deal with required minimum distributions, or RMDs.
RMDs are the IRS's way of getting to tax retirement savers who contributed to their IRAs or 401(k)s on a pretax basis. Starting at 73 or 75, depending on your year of birth, you must withdraw a certain portion of your retirement savings.
If you have your savings in a traditional IRA or 401(k), it's important to manage RMDs wisely. That means avoiding these mistakes.
1. Missing the deadline
Perhaps the biggest RMD mistake you might make is missing the deadline. RMDs are due by Dec. 31 every year. And you'll lose 25% of whatever amount you fail to withdraw. If you're on the hook for a $10,000 RMD, for example, not taking it could cost you $2,500 off the bat.
One thing you may want to do is automate your RMDs so you don't neglect to take them. Most financial institutions let you set up withdrawals ahead of time, and you can generally opt to take your money out monthly, quarterly, or annually.
2. Deferring your first withdrawal
You're allowed to defer your first RMD to April 1 of the year after you turn 73 or 75 -- whichever age RMDs start for you. And that might seem like a good thing to do, since you can put off the tax bill that comes with it.
But if you delay your first RMD, you'll have to take two mandatory withdrawals the next year. That could push you into a higher tax bracket and have other unwanted consequences.
3. Assuming you can't reinvest the money
RMDs force you to remove funds from a tax-advantaged retirement account. They don't, however, compel you to go out and spend the money if you don't have a need for it.
If you're taking your RMD because you're following the rules but don't have a specific use for that money, don't blow it. You can always reinvest it in a taxable account and put it to work once again. And if you don't want to reinvest it, you can save it.
Just because you're retired doesn't mean you don't need an emergency fund. It's important to have cash on hand for things like home repairs and medical bills. So don't look at your RMD as free money. It's your money, and you should manage it carefully.
Part of having money in a traditional retirement plan is dealing with RMDs. If you want to avoid financial upheaval, do your best to steer clear of these glaring mistakes.