Barry Glassman, CFP

Barry Glassman, CFP®

His vision for starting GWS was to deliver investment strategies and wealth management services typically available at the highest levels of wealth. Today, clients benefit from these sophisticated financial services targeted to meet their unique needs.

When you put earned income into a tax-deferred account like an IRA or a 401(k), Uncle Sam eventually wants to collect those taxes. So starting in the year you turn 70 ½, the IRS requires that you take a Required Minimum Distribution (RMD). It’s important to know when and how much to take to avoid hefty penalties. Here are the Top 5 mistakes people make with RMDs and how you can avoid them:

1. Knowing when to take the first distribution

One of the most confusing RMD requirements and the question most clients ask is, “When do I have to start taking my required minimum distributions?” The clock starts the year that you turn 70 ½, but you can delay taking that first distribution until April 1 of the year following the year that you turned 70 ½.

Let’s say you turn 70 ½ on November 5, 2014. For this first distribution, you can elect to either take the RMD by December 31 of 2015, or wait and take it by April 1 of 2016. Keep in mind that if you delay your first RMD distribution to 2016, you’ll have to take two RMDs in that year, one for the delayed initial year, in this case due by April 1, 2016 and one for the prior year, due by December 31, 2016.

2. Missing a required distribution

The most common mistake people make is to forget to take a required minimum distribution each year. As I mentioned above, with the exception of the first year, RMDs must be taken by December 31 each year. If you fail to take the full required distribution by December 31, the IRS will impose a 50% penalty for the amount not taken on time.

3. Not calculating your RMD correctly

Many people forget to include all their retirement accounts when calculating their RMDs. These accounts include:

  • Profit-sharing plans
  • Traditional IRAs, as well as IRA-based accounts such as SEPs, SARSEPs and Simple IRAs
  • Traditional and Roth 401(k) and 457(b) plans
  • 403(b) contracts

Your RMD calculation is based on the December 31 balance in those accounts so you’ll need to have your December account statements handy.

If you have multiple IRAs, you can add those balances together and treat the calculation as one. The same goes for 403(b) contracts.

Don’t know how to calculate your RMDs? No worries. Our “What Is Your RMD?” guide will show you how to calculate this distribution along with lots of other information you’ll need to know. Keep in mind that 401(k) and 457(b) accounts cannot be aggregated and must be calculated separately.

4. Taking the distribution from the wrong account

RMDs from multiple IRAs or 403(b) accounts can either be taken from each account, or aggregated and taken from just one account. But keep in mind that you can’t take those distributions from another type of plan, i.e. you can’t take an IRA distribution from a 403(b) account or a 401(k) distribution from an IRA account.

401(k), 457(b) and profit-sharing plans cannot be aggregated. Each RMD must be calculated separately and taken from that account.

5. Not planning ahead for your RMDs

The world of RMDs is complicated with exceptions and rules for many circumstances from naming beneficiaries, to the treatment of inherited IRAs, and those still employed at 70 ½, not to mention tax planning for RMDs. This list is long and mistakes are all too common, so it’s a good idea to seek advice from your accountant or financial planner before it’s time to take them. For answers to many RMD questions, a great resource to consult is The Slott Report – American’s IRA expert.

If you want more information, consider downloading our What Is Your RMD? guide. Or if you would like to know more about how we help clients with their RMDs, please Contact Us.

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