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Required minimum distributions (RMDs) are mandatory withdrawals from retirement accounts once you reach a certain age. Failing to follow the rules can lead to significant penalties and financial loss. Understanding common mistakes can help you avoid costly errors and ensure compliance with IRS regulations.
Not Taking RMDs on Time
One of the most common mistakes is missing the deadline to take your RMD. The IRS requires you to start withdrawals by April 1 of the year you turn 73 (or 72 if you were born before July 1, 1959). Failing to withdraw on time results in a penalty of 50% of the amount that should have been withdrawn.
Incorrect Calculation of RMD Amount
Calculating the correct RMD amount is crucial. The IRS provides life expectancy tables to determine the distribution. Using outdated or incorrect tables, or miscalculating the account balance, can lead to under-withdrawing or over-withdrawing, both of which have financial consequences.
Withdrawing Less Than the RMD
Withdrawing less than the required amount can result in a hefty penalty. The IRS imposes a 50% excise tax on the shortfall. It is important to verify the correct RMD amount and ensure the full distribution is taken to avoid penalties.
Ignoring RMD Rules for Multiple Accounts
If you have multiple retirement accounts, you must calculate and withdraw the RMD separately from each account, unless they are part of a qualified plan that aggregates distributions. Failing to do so can lead to missed distributions and penalties.