The 6 RMD Mistakes Wealthy Retirees Can’t Afford to Make
Did you know that missing just one required minimum distribution (RMD) could cost you up to 25% in penalties from the IRS? But did you also know that if you catch the mistake within two years, you could get the penalty down to 10%. Learn about how penalties work, the most common required minimum distribution mistakes, and the steps you can take to stay on the IRS’s good side.
What is the Penalty if You Miss Your RMD?
Required minimum distribution mistakes happen. If you miss your required minimum distribution entirely, the IRS can hit you with a 25% penalty on the full amount. For example, if your RMD was $50,000 and you missed it completely, that’s a $12,500 penalty, on top of the taxes you’ll still owe. What if you make a mistake? If you miscalculate the amount and take less than your required minimum distribution, the penalty still applies. In this case, the IRS charges 25% of the shortfall, not the entire balance.
The good news? If you catch the mistake within the first two years, the IRS may reduce that penalty to 10%. In some cases, they may even waive it altogether if you fix it quickly and file IRS Form 5329 with a written explanation.
Still, no one wants to pay extra taxes or file extra forms. A reduced penalty is still money out of your pocket. A 10% penalty on a $50,000 RMD is $5,000 gone for no reason. That’s why it’s so important to understand the most common mistakes and how to avoid them in the first place.
SEE ALSO: The 5 Mistakes That Can Destroy Your Retirement Plans
Mistake #1: Using the Wrong IRS Table
To calculate your RMD, the IRS provides three life expectancy tables: Single Life Table, Uniform Lifetime Table, and Joint Life Table. Using the wrong one can throw off your entire calculation.
| Table | Who uses it | When |
|---|---|---|
| Single life | Beneficiaries | Inherited accounts requiring annual RMDs based on life expectancy |
| Uniform lifetime | Owners | Default table for most account holders taking RMDs from their own IRA or 401(k) |
| Joint life | Owners | If the spouse is more than 10 years younger and is the sole beneficiary |
Here’s how to tell which table you should use:
- The Uniform Lifetime Table is the one most retirees use for their own IRAs or 401(k) s. It applies if your spouse is not more than 10 years younger than you.
- The Joint Life and Last Survivor Table is best if your spouse is more than 10 years younger and is your sole beneficiary. You can use this table. It usually results in a smaller required withdrawal because the funds are expected to last over two lifetimes.
- The Single Life Table is used for inherited IRAs where the original account holder died before 2020. It’s part of the older “stretch IRA” rules that allowed beneficiaries to take RMDs over their lifetime.
Mistake #2: Not Knowing When to Start
A lot of people get confused about the RMD start age because the age requirements have changed several times over the years.
RMD Age Rules
- Born before July 1, 1949: RMD age is 70½.
- Born July 1, 1949 – December 31, 1950: RMD age is 72.
- Born January 1, 1951 – December 31, 1959: RMD age is 73.
- Born on or after January 1, 1960: RMD age is 75.
You calculate your first RMD based on your account balance as of December 31 of the previous year. If you don’t take that first RMD in the year you reach your RMD age, the IRS gives you until April 1 of the following year to get it done. On paper, that sounds convenient. In reality, it can easily become an “out of sight, out of mind” problem. You roll into the next year thinking about that year’s RMD, and it’s very easy to forget that you still owe a distribution for the previous year.
If you push your first RMD into the next calendar year, you’ll end up taking two RMDs in the same year. That extra income can bump you into a higher tax bracket. That’s why, in many situations, it’s better to spread withdrawals over two years instead of stacking them into one. This can be especially helpful if you’re no longer working and you rely on your retirement accounts to cover living expenses.
As with any tax-related decision, it’s smart to talk with a tax advisor or CPA before deciding whether to delay or take your first RMD in the year you qualify.
Mistake #3: Assuming Someone Else Handles RMD
Another really common required minimum distribution mistake is thinking someone else is dealing with it for you. A lot of people have old 401(k) accounts scattered across former employers and assume someone will tap them on the shoulder when it’s time to take an RMD. That’s not the case.
The IRS has a rule (Notice 2002-27) that requires IRA custodians and trustees to notify you when you have an RMD due. They must notify you of your RMD obligation and, if you ask, they can even calculate the amount for you. Firms like Schwab often include this right on the client statement. Many 401(k) plans are not subject to that same rule. Some plans may send reminders as a courtesy, but they are not required to do so. You still have to take the final step. It’s your responsibility to request the withdrawal and actually move the money out of the account to satisfy your required minimum distribution.
Mistake #4: Waiting Until the End of the Year
Many people wait until December to take their RMD, thinking it allows the money to grow longer. In theory, that’s true. But in practice, this strategy can backfire. Delays with paperwork, especially with old 401(k) plans, can push your distribution into January. Suddenly, you’ve missed the deadline and owe a RMD penalty.
A better approach is to make a plan early in the year. If you know you’ll need the money anyway, you can divide your RMD into 12 monthly withdrawals. Taking one-twelfth each month keeps things simple and removes the risk of forgetting your distribution altogether.
Tip: If you withhold taxes directly from your RMD, the net amount you receive won’t equal the total RMD requirement. For example, if you withhold 10% or 15%, the amount landing in your checking account will be smaller than the gross distribution needed to satisfy the IRS.
So, when you’re choosing between taking your RMD monthly or waiting until the end of the year, factor in how tax withholding affects what you actually receive versus what the IRS counts as your full required minimum distribution.
Mistake #5: Forgetting to Aggregate Accounts
This common RMD mistake is easy to avoid if you know where all your IRAs and 401(k)s are. If you have multiple retirement accounts, this one’s important. You can combine all your traditional IRAs and take your total RMD from just one IRA, if you’d like. But that rule doesn’t apply across account types.
For example:
- You can’t take your 401(k) RMD from your IRA.
- You can’t combine RMDs across different employer plans.
If you have multiple 401(k)s from different former employers, you’ll need to calculate the RMD for each one separately and follow the rules for that specific account type. Forgetting even a small account can trigger the same 25% penalty as missing a large one. Keep a list of all your retirement accounts, including the custodian and account balance for each. Updating this list annually helps ensure no account slips through the cracks.
SEE ALSO: 4 Retirement Traps No One Tells You About
Mistake #6: Missing RMDs from Inherited IRAs
The last major mistake is overlooking a required minimum distribution from a beneficiary IRA. This happens more often than you’d think. People inherit an IRA, set it aside, and forget about it. Others wait too long to start the process, especially if the account is held at a custodian that’s slow to work with or tied to a product like an annuity. Processing can take weeks, sometimes months, so starting early is essential.
One of the biggest problem areas since the SECURE ACT 2.0 has been beneficiary IRAs.
Here’s where it gets tricky:
- If the original account owner died before January 1, 2020, beneficiaries can still use the Single Life Table and “stretch” RMDs over their lifetime.
- If they died on or after January 1, 2020, most non-spouse beneficiaries must empty the account within 10 years of the owner’s death.
This is called the 10-year rule, and it applies to inherited IRAs, 401(k)s, and similar accounts. Even more confusing, if the original owner had already started RMDs, the beneficiary may still need to take annual distributions in years 1 through 9, and then fully empty the account in year 10.
Missing even one year’s distribution can cause steep penalties. If you’ve inherited an IRA, talk to a financial advisor right away to clarify your obligations.
How to Avoid Required Minimum Distribution Mistakes
If you’ve already missed an RMD or discovered an error, don’t panic — but do act fast.
You’ll need to:
- Take the missed amount immediately.
- File IRS Form 5329, explaining the mistake and requesting a waiver.
- Attach a written explanation describing what happened and how you corrected it.
If you act within two years, the IRS may reduce your penalty from 25% to 10%, or even waive it entirely. The sooner you fix the issue, the better your chances. The IRS gives some flexibility if you correct an honest mistake quickly, but RMD errors can still be costly. A 25% penalty on money you’ve already earned is something no retiree wants.
At Paces Ferry Wealth Advisors, we help clients manage retirement income, tax planning, and RMD timing with confidence. If you want to make sure your distributions are handled properly, contact Paces Ferry Wealth Advisors to schedule a call.
Paces Ferry Wealth Advisors, LLC is a registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”). This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor.
