The 4 Traps of Required Minimum Distributions

Avoid these unless you want a big penalty.

older couple reading paper

You've been saving and investing all these years, and now you've reached the best part: taking the money out!

Whoa. Not so fast. There's a reason I say the IRS RMD rules stands for ”Really Mean and Dastardly.” RMDs (the Required Minimum Distribution) can easily trap you despite your sincere efforts to comply with tax law.

Starting in your 70s, you must withdraw some of the money from your IRAs and employer-sponsored retirement accounts. (Currently, this doesn’t not apply to Roth accounts.)

How much must you withdraw? The rules are so complex I sometimes think Congress did it on purpose: If you withdraw too little, the IRS slaps you with a penalty equal to 50% of the amount you were supposed to withdraw but didn’t. If you take too much, you pay more in taxes than you needed to.

That’s why I recommend you let a professional tax advisor handle the calculation for you. But if you insist on calculating this on your own , please avoid these four traps that we have seen ensnare many people.

Mistaking Your Deadline for Your First Withdrawal

You probably think you must take your first RMD when you reach 70½ . Wrong.
You must take your first RMD by April 1 of the year following the year you turn 70½.

Using the Wrong Date for Your Account Value

Getting this single date wrong has caused many taxpayers to lose huge amounts of money to the IRS. To calculate your required minimum distribution, you use the value of your account as of the prior Dec. 31 – not the value as of the date you make the withdrawal.

Forgetting to Adjust Your Life Expectancy

I'm sorry, but next year, your life expectancy will be shorter than it is today (according to the IRS, which publishes tables showing your life expectancy for the purposes of RMD calculations). You must determine anew each year your life expectancy factor and use it to recalculate the amount you must with withdraw every year.

Mismanaging Multiple Retirement Accounts

You must determine the RMD for each retirement account and IRA (except for Roths). But it's not that simple (cue anguished laughter). The rules vary depending on the kind of account you have.

The RMD: Yep. The rules are Really Mean and Dastardly.