TRADITIONAL RETIREMENT accounts are tax-deferred, not tax-free. As baby boomers turn 70, they must soon begin mandated withdrawals and pay the taxes on the money they tucked into retirement accounts over several decades.
A required minimum distribution is the amount retirement account owners must withdraw from their IRAs and 401(k)s each year. When you take these withdrawals, you also have to pay taxes on each distribution. Retirement account withdrawals are required after age 70 1/2, except for Roth IRAs, which do not have distribution requirements for the original account owner.
It can be somewhat complicated to calculate your required minimum distribution, especially if you have multiple retirement accounts. If you miss a distribution or withdraw the incorrect amount, you could trigger big tax penalties. “There are tax consequences once you reach the point of taking RMDs,” says Jared Snider, a senior wealth advisor at Exencial Wealth Advisors in Oklahoma City. “The biggest mistakes all relate to taxes.”
Required minimum distribution mistakes include:
- Forgetting a RMD.
- Failing to consult a financial professional.
- Making no long-term plan for required withdrawals.
- Not realizing that distributions count as income.
- Missing a RMD deadline.
- Withdrawing the wrong amount.
- Assuming 401(k)s and IRAs have the same RMD rules.