4 RMD Mistakes to Avoid – Morningstar

If you’ll be 73 or older by the end of this year, you’ll need to take required minimum distributions from your traditional retirement plan, Simplified Employee Pension (SEP), or Employee Savings Incentive Match Plan (Simple IRA). If you have assets in your employer’s plan, you may also need to take an RMD from that account. Working within the limits of the RMD rules can help you avoid the excise tax that’s levied if you miss the RMD deadline.

Note: As of 2024, there are no RMDs on Roth 401(k)s. As of 2024, RMDs no longer apply to participants’ designated Roth accounts (Roth 401(k), Roth 403(b), and government Roth 457(b) accounts). However, the RMD rules continue to apply to beneficiaries of designated Roth accounts.

Employer plan RMD deadline extension

If you have assets in your employer’s retirement plan and are currently employed by the employer that sponsors the plan, you may be able to defer your RMDs beyond the applicable age if the terms of the plan allow for such deferral. Check with your human resources department or your employer’s plan administrator to see if you are permitted to defer your RMDs until retirement. This deferral option is not available if you own more than 5% of the company sponsoring the plan, and is not available for all IRAs, including SEP IRAs and Simple IRAs.

RMD mistakes to avoid

If you make a mistake with your RMD, you could end up taking more or less than you need to. If you take more, you don’t have to pay sales tax and you can carry it forward. Eligible amount It will be deducted from your excess RMD. However, if you deduct less, you will have to pay an excise tax of 25% of the shortfall to the IRS. Below are some common mistakes that can lead to an RMD shortfall and some tips on how to avoid them.

1. If your RMD deadline has passed

The deadline to take your 2024 RMD is December 31, 2024. However, if you turn age 73 in 2024, you can take your 2024 RMD until April 1, 2025.

Consider the tax consequences of deferred RMDs.

If you reach age 73 in 2024 and defer your 2024 RMD to 2025, you will be required to take two RMDs in 2025. Consult with your tax advisor to determine the tax consequences of such a deferral.

2. Misapplication of RMD aggregation rules

If you have multiple retirement accounts, you can withdraw your combined RMD from one or more of those accounts. This aggregation of RMDs is permitted only in limited circumstances. Aggregating RMDs when not permitted would result in an RMD deficiency.

exampleBelow is a list of John, age 75,’s tax-deferred accounts and the RMDs due in 2024 from each account.

• Traditional IRA: $100,000
• SEP IRA: $100,000
• 401(k): $500,000
• 403(b): $20,000

John decided to take RMDs from his 401(k) totaling $720,000. For 2024, he took no other distributions.

Because John can only withdraw $500,000 from his 401(k), he owes 25% sales tax on $220,000 ($720,000 – $500,000).

The only aggregations John is allowed are traditional IRAs and SEP IRAs.

If John had multiple 403(b) accounts, he would be allowed to aggregate RMDs for those as well.

Notes: RMD in Beneficiary Account You cannot combine RMDs with those from your own (non-beneficiary) accounts.

3. Failing to Make Fair Market Value Adjustments

Your RMD for 2024 is calculated by dividing the fair market value at the end of 2023 by your life expectancy in 2024. Life expectancy is determined using the Uniform Life Expectancy Tables. Table III of Appendix B of IRS Publication 590-B (page 65)You must use the Uniform Lifetime Table in all cases, except when your spouse is the sole primary beneficiary and is 10 years or more younger than your spouse. In that exception: Appendix B, Table II (Life expectancy table for last survivor) (page 50) May be used.

For employer plan accounts, check with your plan administrator to find out your RMD amount.

For IRAs, your IRA custodian should have sent you an RMD statement for your 2024 RMD by January 31, 2024. This statement should include your RMD amount or an offer to calculate it upon request.

While the RMD calculations performed by your IRA custodian are usually accurate, if you have outstanding rollovers or transfers, the calculations will reflect less than your actual RMD. In these cases, you should work with your tax accountant or other relevant professionals to recalculate your RMD amounts.

exampleSusan, 74, takes a $500,000 distribution from her traditional IRA in December 2023 and rolls that amount over into a traditional IRA in January 2024.

When Susan’s IRA custodian calculated her 2024 RMD, she used the recorded fair market value as of December 31, 2023. Because the recorded fair market value does not include the $500,000, the calculation results in a shortfall of $19,608 ($500,000 / 25.5). Susan must recalculate her 2024 RMD by adding the $500,000 to the December 31, 2023 fair market value recorded by her IRA custodian.

4. Insufficient funds to cover RMDs

To cover your RMDs, you need enough cash or assets that you can quickly convert or distribute in kind. Publicly traded assets usually meet this requirement. However, privately traded assets may take months to convert or distribute in kind, potentially missing the deadline to take your RMD. The IRS calls these assets “hard-to-value assets” and lists them as follows:

• Something that is not readily tradeable in an established securities market, such as stock, other ownership interests in a company, or short-term or long-term debt.
• Ownership interests in limited liability companies, partnerships, trusts, or similar entities (unless such interests are traded on an established securities market).
• real estate.
• Options contracts or similar instruments that are not traded on an established options exchange.
• Other assets whose fair market value is not readily known.

If you have such assets in an IRA, make sure you have enough cash or other suitable assets to cover your RMD in case you cannot liquidate or distribute the hard-to-value assets in time to satisfy your RMD obligation. If you have multiple IRAs, you can use the RMD aggregation rules to satisfy the RMD for IRAs that hold only hard-to-value assets. If you miss an RMD deadline because of the hard-to-value asset limit, your tax preparer can IRS Form 5329 Apply for a sales tax exemption for “good cause.”

RMDs are only one part of financial and tax planning

When planning your RMD strategy, you need to consider how it will affect other aspects of your finances, taxes, estate planning, benefits, etc. Medicare Part B and Prescription Drug Premiums.

Ideally, your advisor should plan for you at least a few years before your RMDs are due. If you’re already over 73 this year, it’s not too late. But you should meet with your financial and tax advisors soon to start planning for your 2024 RMDs.