Avoiding Costly RMD Mistakes: A Retirement Guide for Smarter Withdrawals
If you’re approaching age 73 or older, Required Minimum Distributions (RMDs) are critical to your retirement planning. The IRS requires annual withdrawals from traditional IRAs, 401(k)s, and other tax-deferred accounts beginning at a specific age and misunderstandings can lead to penalties that significantly erode your retirement funds. With recent law changes, understanding the latest rules is more important than ever.
1. When Do RMDs Start?
- For traditional IRAs and workplace retirement plans, RMDs generally must begin at age 73 if you turn 72 in 2023 or later, under SECURE 2.0.
- The RMD age will increase to 75 starting in 2033.
- Roth IRAs are exempt from lifetime RMDs.
2. Avoiding Missed RMD Penalties
- If you fail to take your RMD, the IRS imposes a 25% excise tax on the missed amount.
- This penalty can be reduced to 10% if corrected within two years.
3. Aggregation Rules: Smart Account Management
- You must calculate RMDs separately by account but can withdraw the total required amount from any one or combination of your IRAs.
- 401(k) and most other workplace accounts must be handled separately no combining allowed. However, multiple 403(b) accounts can be aggregated.
- Roth 401(k)s/403(b)s are exempt from RMDs starting in 2024.
4. RMDs and Rollovers: Know the Order
- You cannot rollover your RMD that amount must be withdrawn outright before any rollover can happen.
- Attempting to include the RMD in a rollover triggers tax penalties.
5. Spousal Beneficiary Rules
- A surviving spouse with an inherited IRA can:
- Treat it as their own, delaying RMDs until 73 (or 75 depending on birth year);
- Or keep it as an inherited IRA and begin RMDs sooner this option offers flexibility but is more complex.
6. Roth Conversions: A Strategic Move
- Roth conversions eliminate future RMDs and enable tax-free growth, but converting too much in a single year can trigger higher income taxes and impact Medicare premiums and Social Security taxation.
- A laddered approach spreading conversions over several years can help manage your tax bracket more effectively.
7. Quick Summary Table
| Issue | Guidance |
|---|---|
| RMD Starting Age | Age 73 starting in 2023; age 75 starting in 2033 |
| Missed RMD Penalty | 25%, reduced to 10% if fixed promptly |
| Aggregating IRAs | Allowed across IRAs only |
| Workplace Plan Aggregation | Not allowed, except for 403(b) plans |
| Roth 401(k)/403(b) RMDs | Exempt from RMDs starting in 2024 |
| RMDs in Rollovers | Not allowed; must take RMD first |
| Inheritance Options | Treat as own or inherited each has strategic implications |
| Roth Conversion Strategy | Consider partial conversions over time for tax efficiency |
By staying informed on rules like updated RMD ages, Roth plan exemptions, and rollover restrictions you can avoid costly mistakes and make smarter, tax-efficient decisions that preserve your retirement security.
All writings are for educational and entertainment purposes only and does not provide investment or financial advice of any kind.
