Required minimum distributions demand your attention once you turn 73. Miss the deadline or miscalculate your withdrawal amount, and the IRS penalizes you heavily. A 25% tax on the shortfall drops to 10% if you correct it within two years, but that still stings your retirement nest egg.
The five costliest RMD mistakes happen repeatedly. First, people withdraw too little. You must distribute a percentage of your retirement account balance based on IRS life expectancy tables. Calculate wrong, and penalties follow. Second, some retirees forget RMDs apply to multiple accounts. You own an IRA, a 401(k), and a Roth conversion IRA? Each has separate RMD rules. Consolidating accounts before age 73 simplifies tracking and reduces error risk.
Third mistake: ignoring pro-rata rules when converting traditional IRA money to Roth accounts. The IRS taxes conversions based on your total pre-tax and after-tax IRA balances, not just the converted amount. This catches many people off guard. Fourth, failing to name or update beneficiaries creates chaos. When you die without named beneficiaries, heirs face compressed RMD schedules and higher tax bills. Fifth, delaying RMD planning until December brings rushed decisions and missed filing deadlines.
Early planning shifts this burden. Work with a tax professional by October to verify your RMD calculation against IRS Publication 590-B tables. Check that your financial institution processes the correct withdrawal amount by the December 31 deadline. Review your beneficiary designations annually. Name specific people rather than your estate, which triggers higher taxes for heirs.
Consolidating accounts before age 73 cuts administrative headaches. If you work past 73 and still earn income, the still-working exception may defer RMDs from your current employer's