Avoid RMD Penalties: What Every Retiree Must Know
The Retirement Mistake That Could Cost You Thousands
Retirement is your time—the reward for decades of dedication, planning, and saving. Yet, even the best-laid plans can be upended by a simple oversight: missing a Required Minimum Distribution (RMD).
For years, your retirement accounts have grown tax-deferred, but once you hit age 73, the IRS mandates annual withdrawals. The penalty for missing an RMD? A whopping 25% of the amount you should have withdrawn. That’s not just a hiccup; it’s a financial setback you don’t need in your golden years.
In my years of guiding retirees through the complexities of wealth management, I’ve witnessed too many people blindsided by these rules. It doesn’t have to be that way. With the right knowledge and strategies, you can avoid penalties and keep your retirement on track.
Common Mistakes Retirees Make With RMDs
Even the most careful retirees can trip up when navigating RMDs. The rules might seem straightforward, but the fine print often leads to costly errors. Let’s look at the three most common mistakes and what you can learn from them.
Mistake 1: Forgetting to Take an RMD
I worked with a retired engineer who always prided himself on his precision. In his first year of RMD eligibility, he assumed his financial institution would handle the withdrawal. By the time he realized the oversight, he faced a 25% penalty on the $40,000 he missed withdrawing. That’s $10,000 lost—not to market downturns, but to a missed deadline.
What You Can Do: Automate your withdrawals or set calendar reminders to ensure deadlines aren’t missed.
Mistake 2: Miscalculating the Withdrawal Amount
Even retirees who know about RMDs can stumble over the math. The IRS uses your account balance as of December 31st of the prior year and a life expectancy factor to calculate your RMD. However, RMDs from traditional IRAs can be combined into a single withdrawal, while 401(k)s must be handled individually.
Real-Life Example: One retiree withdrew from their IRA alone, thinking it covered their 401(k). The shortfall resulted in a hefty penalty.
What You Can Do: Work with a professional to review your accounts and ensure calculations are accurate.
Mistake 3: Waiting Until the Last Minute
Before our relationship, another client delayed her RMD until December, hoping for a market rebound. A health emergency consumed her attention, and she missed the deadline entirely. If she’d taken smaller, automated withdrawals earlier in the year, she could have avoided the penalty.
What You Can Do: Spread out withdrawals throughout the year to reduce stress and avoid surprises.
What You Can Learn From This
These mistakes aren’t just about misunderstandings—they’re about the stress and cost they bring to your retirement. The good news? They’re entirely avoidable with the right plan.
Ask yourself:
Do you know your RMD amount for this year?
Are you confident it’s been calculated and withdrawn correctly?
If you’re uncertain, there’s no need to panic—there’s time to take action and get back on track.
