Avoid these common IRA mistakes
Consequence of not taking RMDs can be severe — and costly
Nearly four in 10 households in the U.S. own an individual retirement arrangement or IRA. And that means some 50 million households might someday make a costly and perhaps irrevocable mistake when it comes time to take required minimum distributions — or RMDs — from those accounts.
According to Uncle Sam, you generally must start taking withdrawals — RMDs — from your IRA, SEP IRA, SIMPLE IRA or retirement plan account when you reach age 701⁄ 2. Your RMD is the minimum amount you must withdraw from your account each year. And according to the IRS, the be- ginning date for your first RMD for IRAs, including SEP and SIMPLE IRAs, is April 1 of the year following the calendar year in which you reach age 701⁄ 2. For 401(k), profit-sharing, 403( b) or other defined contribution plans, it’s generally April 1, following the later of the calendar year in which you reach age 701⁄ or 2 retire.
Sounds simple, but retirement account owners make plenty of mistakes when it comes to RMDs. Here’s a look at some of the common mistakes made:
uYou need to
take your RMD. “The most common mistake is either someone not taking RMDs from their qualified accounts or not enough,” says Thomas O’Connell, president of International Financial Advisory Group.
And claiming ignorance when you forget to take a distribution is no excuse. “Thinking and believing that ‘no one told me about the rules’ is a valid excuse for missing or messing up the amount you take for your RMD,” says Matthew Curfman, the president and co-owner of Richmond Brothers. uAre you still working past
age 70? More people are working until or past age 70, says Joseph Clark, a managing partner with The Financial Enhancement Group.
“They seem to forget the technical rule is you must take an RMD the year after the year you turn 701⁄ 2,” he says. “But if you wait you must take two distributions the following year and the first prior to April 1. This is important when people have large payouts their final year of work.” uOwn a 401( k) and still working ?
Many account owners don’t know if they can delay taking their
RMD if they own a 401(k) and are still working.
“Assuming you are not a material owner — that is, you own less than 5% of a business sponsoring the plan — you don’t have to take an RMD from a 401(k) while working,” Clark says. “You do, however, have to take the RMD from IRAs regardless of working or not when you reach the 701⁄ mark or the year after. 2
where possible. Aggregate and consolidate your IRA accounts and your 403( b) accounts, when possible. This sort of aggregation, Clark says, is confusing to professionals, especially in the academic world where they have 403( b) accounts and IRAs at the same custodian.
Of note, the consequence of not taking the correct RMD from the right accounts is severe. “The penalty for a missed RMD or less than full RMD is a 50% penalty plus interest on what was not taken,” O’Connell says.