As December nears, many older Americans will need to withdraw from their retirement accounts. Experts warn that mistakes here can be quite costly.
Most retirees must begin taking required minimum distributions (RMDs) at age 73, which are calculated based on their account balance, age, and a life expectancy factor from the IRS. Your first RMD is due by April 1 of the year after you turn 73, and subsequent withdrawals are due by December 31. If you wait until April, you might have to take two RMDs in that year.
Many retirees face complex RMD rules, and failing to comply can lead to serious issues like penalties from the IRS. Compliance can be tricky, especially since regulations change. “RMD errors often stem from complexity rather than neglect,” shares Scott Van den Bergh, a certified financial planner. He notes that many people aren’t aware of how many accounts they own, nor how quickly the rules can shift.
If you don’t withdraw your RMD in full by the deadline, you could incur a penalty of 25% on the owed amount. Interestingly, the IRS allows for a reduction to 10% if the RMD is “timely modified” within two years.
Starting late can be risky
CFP Tom Geoghegan, from Beacon Hill Private Wealth, emphasizes that December 31 is crucial. Many retirees delay the process, which can lead to mistakes. “Waiting until December to sort everything out is a huge misstep,” he explains. Rushing can result in miscalculating amounts or even selling the wrong assets, as deadlines loom.
It’s wise to start this process early, allowing time to confirm year-end balances, check beneficiary information, and determine the overall best way to withdraw funds, he advises.
Don’t overlook any accounts
When figuring out your RMD, it’s essential to consider each of your accounts separately.
A common mistake involves overlooking old 401(k)s or forgetting to roll over accounts. Van den Bergh mentions taking over several individual retirement accounts where people had simply forgotten details. To sidestep this issue, it’s helpful to create a “master list” of all your accounts each January. This should include which companies manage your assets and the RMD requirements linked to each one.
Utilizing charitable contributions
For those donating to charity, a qualified charitable distribution (QCD) can effectively reduce your RMD. This process involves transferring funds directly from your IRA to a qualified nonprofit.
Geoghegan notes that QCDs are often “underutilized” but can be beneficial for meeting RMDs. Those aged 70 ½ or older can contribute up to $108,000 using a QCD in 2025. If a couple files jointly, the older spouse can also direct up to that amount from their IRA. An added perk of a QCD is that it reduces your taxable income, which can positively impact Medicare premiums.
