4 RMD Mistakes to Avoid

If you’re at least age 73 by the end of this year, you must take a required minimum distribution from your traditional retirement plan; Simplified Employee Pension, or SEP; or savings incentive match plan for employees, or Simple IRA. If you have assets under an employer plan, you might also need to take an RMD from that account. Operating within the limitations of the RMD rules can help you to avoid the excise tax that would apply if you missed your RMD deadline.

Note: No RMDs for Roth 401(k)s as of 2024. As of 2024, RMDs no longer apply to participants’ designated Roth accounts, which are Roth 401(k), Roth 403(b), and governmental Roth 457(b) accounts. However, the RMD rules still apply to designated Roth account beneficiaries.

RMD Extended Deadline for Employer Plans

If you have assets in an employer retirement plan and you are currently employed by the employer that sponsored the plan, you may defer your RMDs past your applicable age if such a deferral is permitted under the terms of the plan. Check with your human resources department or the administrator of your employer plan to determine if you are permitted to defer your RMDs until retirement. This deferral option is not available to you if you own more than 5% of the business that sponsors the plan; neither is it available for any IRAs, including SEP IRAs and Simple IRAs.

RMD Mistakes to Avoid

Making a mistake with your RMD could cause you to take more or less than you’re required to. Taking more will not cause you to owe any excise tax, and you can roll over eligible amounts from the amount in excess of your RMD. But if you take less, you will owe the IRS an excise tax of 25% of the shortfall. The following are common mistakes that could result in an RMD shortfall, with notes on how to avoid them.

1. Missing Your RMD Deadline

The deadline for taking your 2024 RMD is Dec. 31, 2024. However, if you reach 73 in 2024, your 2024 RMD can be taken as late as April 1, 2025.

Consider the tax implications of a deferred RMD.

If you reach age 73 in 2024 and defer your 2024 RMD to 2025, you will need to take two RMDs in 2025. Consult with your tax advisor to determine the tax impact of such a deferral.

2. Misapplying the RMD Aggregation Rule

If you own multiple retirement accounts, you may take your total RMD due from one or more of those accounts. This aggregation of your RMD is allowed under limited circumstances. Aggregation of RMD when it is not permitted will result in a shortfall of your RMD.

Example: The following is a list of 75-year-old John’s tax-deferred accounts and the RMD due from each for 2024.

• A traditional IRA: $100,000
• A SEP IRA: $100,000
• A 401(k): $500,000
• A 403(b): $20,000

John decided to take the total RMD of $720,000 from his 401(k). He did not take any other distribution for 2024.

John will owe a 25% excise tax on $220,000 ($720,000-$500,000), because only the $500,000 can be taken from his 401(k).

The only aggregation permitted for John is the traditional IRA and the SEP IRA.

If John had multiple 403(b) accounts, RMD aggregation would have also been permitted for those.

Note: RMDs for beneficiary accounts may not be aggregated with RMD for your own (nonbeneficiary) accounts.

3. Failing to Adjust Your Fair Market Value

Your 2024 RMD is determined by dividing your 2023 year-end fair market value by your 2024 life expectancy. Your life expectancy is determined using the Uniform Lifetime Table. See Table III of Appendix B of IRS Publication 590-B (Page 65). The Uniform Lifetime Table must be used in all cases except when your spouse is your sole primary beneficiary and is more than 10 years your junior. Under that exception, Table II (Joint Life and Last Survivor Expectancy table) in Appendix B (Page 50) may be used.

For your employer plan accounts, check with your plan administrator for your RMD amount.

For your IRAs, your IRA custodian should have sent you an RMD statement by Jan. 31, 2024, for your 2024 RMD. This statement is required to include your RMD amount or an offer to calculate it upon request.

While RMD calculations done by IRA custodians are usually accurate, an outstanding rollover or transfer will cause the calculation to reflect an amount that is less than your true RMD. In such cases, you must work with your tax advisor or other relevant professional to refigure your RMD amount.

Example: 74-year-old Susan took a distribution of $500,000 from her traditional IRA in December 2023 and rolled over the amount to her traditional IRA in January 2024.

When Susan’s IRA custodian calculated her 2024, they used her Dec. 31, 2023, fair market value that they had on record. Because the fair market value they have on record does not include the $500,000, their calculation results in a $19,608 shortfall ($500,000 / 25.5). Susan must refigure her 2024 RMD by adding the $500,000 to the Dec. 31, 2023, fair market value that her IRA custodian has on its record.

4. Having Insufficient Funds to Cover Your RMD

You must have sufficient cash or assets that can be quickly liquidated, or distributed in-kind, to cover your RMD. Publicly traded assets usually meet this requirement. However, nonpublicly traded assets can take months to liquidate or distribute in-kind and could cause the deadline for taking RMDs to be missed. The IRS refers to these assets as “hard-to-value assets,” and they list them as follows:

• Stock, other ownership interest in a corporation, short- or long-term debt obligations, not readily tradable on an established securities market.
• Ownership interest in a limited liability company, partnership, trust, or similar entity (unless the interest is traded on an established securities market).
• Real estate.
• Option contracts or similar products not offered for trade on an established option exchange.
• Other assets that do not have a readily available fair market value.

If your IRA holds such assets, make sure you have sufficient cash or other suitable assets to cover your RMD, in the event your hard-to-value assets cannot be liquidated or distributed in time to meet your RMD obligations. If you have multiple IRAs, the RMD aggregation rule can be used to satisfy your RMD for your IRA that holds only hard-to-value assets. If you miss your RMD deadline because of limitations with hard-to-value assets, your tax preparer may file IRS Form 5329 to request a waiver of the excise tax due to “reasonable cause.”

RMDs Are Only a Fraction of Your Financial and Tax Planning

When planning your RMD strategy, consideration must be given to how it affects other aspects of your financial, tax, estate planning, and benefits, such as Medicare Part B and prescription drug coverage premiums.

Ideally, your advisor should plan for your RMDs at least a few years before they are due. It is not too late if you are already at least age 73 this year. But you should make appointments with your financial and tax advisors soon to start planning for your 2024 RMD.