Top 10 RMD (Required Minimum Distributions) Mistakes
10. Rolling over an RMD. RMDs are not eligible to be rolled over. This happens most frequently when company plan assets are rolled over to an IRA. If the RMD is not taken first, you now have an excess contribution in the IRA that needs to be corrected.
9. Spouses combining RMDs. One spouse cannot take an RMD for another spouse even if they file a joint tax return and report the correct overall RMD income. There is no such thing as a “joint IRA.”
8. Not taking liquidity into account for RMDs. You say you only have an LLC and tangible real estate in your self-directed IRA? The IRS does not care. Better sell something off to generate the liquidity necessary to meet your RMD requirements.
7. Taking credit for withdrawing an excess in a previous year. Not allowed. Just because you took double your RMD last year does not mean you’re off the hook on your RMD for this year.
6. Thinking the “still-working” exception applies to IRAs. It emphatically does NOT, nor does it apply to plans at companies at which you no longer work. It also does NOT apply if you own more than 5% of your company (counting family ownership).
5. Making traditional IRA contributions after RMDs have begun. Once you reach the year in which you turn 70 ½, traditional IRA contributions must stop. (However, you can contribute to a Roth IRA if you have earned income. Roth IRAs have no age restrictions, only income restrictions).
4. Thinking your annual QCD is limited by the RMD amount. Not true! You can offset your entire RMD (assuming it is not more than $100,000) with a QCD and earmark addition IRA dollars for a QCD up to $100,000 annually. (You can always take more than the RMD, but not less.)
3. Not understanding the RMD aggregation rules. Yes, similarly titled IRAs can be aggregated for RMD purposes. However, you cannot satisfy an RMD from one type of retirement account by withdrawing from a different type of retirement account (for example IRA vs 401k).
2. Not taking an RMD at all. Missing an RMD is a significant mistake and will result in a 50% penalty on any part of the RMD not withdrawn. But not knowing you can have the 50% penalty waived is almost just as egregious.
1. RMD calculation errors. Using the wrong balance, wrong life expectancy, and/or the wrong age can be disastrous. Use the December 31st balance of the year before the distribution year. Also, remember that the life expectancy numbers are factors, not percentages. Finally reach out if you have questions about whether to use age 70 or 71 for the first RMD.
Sally is a CFP and the Director of Financial Planning Services at America Group – Learn more about her here: Sally Cholewka
LPL Financial does not provide tax advice. Clients should consult with their personal tax advisors regarding the tax consequences of investing.