As we approach the end of the year, I wanted to take some time to talk about Required Minimum Distributions (RMDs). For those approaching the age of 73 the government requires that you start taking out a portion of the money in your retirement accounts that you've been deferring for all these years.
Understanding what’s required can get complicated - and a lot of times mistakes are made. So, today I’m going to walk you through the top 10 RMD mistakes, goofs, and blunders to avoid.
#10: Rolling Over an RMD
You cannot roll over your RMD. Let's say you have a $100,000 IRA account and your RMD is $3,800. You have to take that money out and pay taxes on it. You can do a lot of things with it - put it in your bank account, use it to travel, pay a credit card… But the one thing you can't do is roll it back into your IRA account (or another one for that matter).
Be very careful of that, especially if you have a 401(k) plan that is requiring you to take the RMD out.
#9: Husband & Wife Combining RMDs
Another common mistake that couples make is that they think they can combine their RMDs. Nope! All your pre-tax money has to be treated as your own. For example, if a husband and wife each have a half a million dollars in their IRA accounts, and one pulls out $45,000 from their account, they couldn’t say, "Well, now I've covered my spouse's IRA RMD.”
You cannot combine them. Your spouse still has to take out their required minimum distribution.
And remember, if you forget to take your required minimum distribution, not only do you have to take it when you finally realize that error, but there's also going to be a 50% penalty.
#8: Not Having Enough Liquidity in your Self-Directed IRA
A lot of do-it-yourselfers and those in real estate love to have self-directed IRAs and buy real estate properties and alternative type investments. But once you reach the age of 70 ½ (2023 RMDage = 73) you have to get your required minimum distribution out.
Let's say you have a self-directed IRA that's owning the real estate and that real estate is not liquid or generating any income. The IRS doesn't care. You're going to have to sell off something to generate liquidity to meet your RMD needs.
#7: Taking Credit for Withdrawing Excess in the Previous Year
Taking credit for withdrawing an excess in the previous year is not allowed. Just because you took double your RMD the previous year, doesn't mean you can roll that over to the following year. For example, if your RMD was $5,000 and the previous year you took out $10,000, you cannot use what you took out on the previous year for this year's required minimum distribution.
#6: Believing that the “still working” Exception Applies to IRAs
If you are over 70 ½ (2023 RMDage = 73) with a 401(k) and you're a full-time employee, then you do not have to take out your required minimum distribution - as long as you're a full-time employee during that year.
If you do retire on or before December 20th, you are going to be required to take your RMD out. So, the mistake people make is thinking that if they're working, that the 401(k) rule also applies to IRAs. Unfortunately, it does not and it doesn't apply to any other 401(k) plan that you have out there from existing companies that you worked for. So, it's only for the specific company that you work for right now, as long as you're a full-time employee.
#5: Making Traditional IRA contributions After RMDs Have Started
Once you reach the year in which you turn 70 ½ (2023 RMDage = 73), you cannot add any money to your IRA, even if you had income and prior to 70 ½ (2023 RMDage = 73) you were able to put money in. You can contribute to a Roth IRA if you have earned income. Roth IRAs have no age restrictions, only income restrictions. So, making traditional IRA contributions after RMDs have begun is an absolute no-no.
#4: Thinking Your Annual QCD is Limited by the RMD amount
The qualified charitable distribution (QCD) allows you to take a portion of your RMD and donate it directly to a charity. This allows you to cover your RMD and not have to pay taxes. But, your annual QCD is not limited by the RMD amount. You can offset your entire RMD assuming it is not more than $100,000 with a qualified charitable distribution to CD and earmark additional IRA dollars for your QCD up to $100,000. So, if your RMD is $10,000, you can direct the full amount to a charity and not have to pay any taxes on that. But, you can also go above and beyond that! If you wanted, you could give up to $100,000 from the IRA.
#3: Not Understanding the RMD Aggregation Rules
If you have multiple IRAs, you can aggregate those for your RMDs. However, you cannot satisfy an RMD from an employer plan like a 401(k) to cover your IRA. So, if you still have a 401(k) or if you have multiple 401(k)s, each of those 401(k)s have to be treated like their own island - and you will have to take out the required minimum distribution from that. Many people will roll over to an IRA because it gives them more control to take RMDs out from the IRA account that they choose.
#2: Not Taking an RMD at All
Missing an RMD is a huge mistake and will result in a 50% penalty on any part of the RMD that is not withdrawn. If you've made this mistake, there’s still hope! You can file an exception and many times the IRS will be lenient in making you not have to pay that 50% penalty. So, if you've not taken your RMD out, own up to it, take it out immediately, and then try to fill out the form with your CPA to get an exception on that big, 50% penalty.
#1: RMD Calculation Rules and Errors
The number 1 error that we see is RMD calculation rules and errors. So, using the wrong balance, the wrong life expectancy, and/or the wrong age can be disastrous. Use the December 31st balance of the year before the distribution year. So, you want to get the value of all your retirement accounts on December 31st of the previous year. And remember that the life expectancy numbers are factors, not percentages.
Below is an easy way for you to identify what the percentage is….
So, for those that are getting close to 70 ½ (2023 RMDage = 73) or older, hopefully these tips helped. Of course, if you have any questions, you can always reach out to us at any time at questions@bayntree.com.
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