Avoid these costly 4 retirement planning errors that could derail your finances in 2025!
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As the year 2025 unfolds, those of us in the golden years of retirement need to keep a keen eye on our finances, especially when it comes to Required Minimum Distributions (RMDs).
For many Americans over 73, RMDs are a critical aspect of retirement planning, ensuring that the savings accumulated over a lifetime are properly managed and taxed. However, the path to RMD compliance is fraught with potential missteps that could significantly impact your financial well-being.
For those who just turned 73 in 2024, you have until April 1, 2025 to make your 2024 RMD. Luckily, there’s also an exception for those who are still working and own less than 5% of the company.
But if none of these things apply to you, note that December 31 is your deadline. Here’s a guide to the process so you can avoid the four costly RMD mistakes that could derail your finances this year.
1. Failing to withdraw the full RMD amount
The first mistake to watch out for is not taking your full RMD.
The Internal Revenue Service (IRS) mandates these withdrawals because they want to collect taxes on your retirement savings during your lifetime. If you withdraw less than the required amount, you'll face a steep penalty of 25% on the amount you were required to withdraw.
For instance, if your RMD was $5,000 and you only took out $4,000, you'd owe a $250 penalty on the $1,000 you didn't withdraw. While you can reduce this penalty to 10% by rectifying the error within two years, it's best to avoid this costly mistake altogether.
You would have a better experience with withdrawing the funds and paying the taxes (or doing a QCD, described below) instead of avoiding RMDs altogether.
2. Not withdrawing from each of your 401(k)s
For those with multiple retirement accounts, it's crucial to understand the rules for each. While you can aggregate all your IRA RMDs and withdraw the total amount from one IRA, this isn't the case with 401(k)s.
Each 401(k) account requires an individual RMD withdrawal. Neglecting to take an RMD from any 401(k) will result in a penalty on the amount you failed to distribute.
Remember, if you're still working and own less than 5% of the company, you may be able to delay RMDs from your current employer's 401(k), but not from IRAs or 401(k)s from previous employers.
IRAs also have a special rule that allows you to take all of your IRA RMDs from a single account, if you’d prefer. For example, if you have two IRAs, one with $5,000 in RMD and another with $7,000 RMD, you may take $12,000 from one, $6,000 separately, or any combination you’d prefer as long as you withdraw a minimum of $12,000 from your IRAs within the year.
3. Misunderstanding Roth account rules
A common misconception is that Roth accounts require RMDs. As of this year, both Roth IRAs and Roth 401(k)s are exempt from RMDs. This is because Roth accounts are funded with after-tax dollars, and withdrawals are generally tax-free.
The IRS has no reason to mandate distributions from these accounts. However, you're free to make withdrawals if you wish, and doing so can be strategically beneficial if you're close to a higher tax bracket, as Roth withdrawals won't increase your taxable income.
4. Confusing RMDs with Qualified Charitable Distributions (QCDs)
The fourth mistake to avoid is taking your RMD and then donating it to charity, rather than directly making a Qualified Charitable Distribution (QCD). A QCD allows you to transfer funds directly from your retirement account to a qualifying charity, satisfying your RMD without increasing your taxable income.
This is different from taking an RMD and then donating it, which could raise your adjusted gross income (AGI) and limit your charitable deduction based on your AGI. Remember, the maximum QCD for 2024 is $105,000, and it's only available to those 73 and older.
Some differences to take note of are:
While on the subject of RMDs, you might want to learn how to maximize your retirement funds through strategies you can definitely benefit from. Read more about these tips in this story here.
Have you encountered challenges with RMDs, or do you have strategies that have worked well for you? Share your experiences and insights in the comments below!
For many Americans over 73, RMDs are a critical aspect of retirement planning, ensuring that the savings accumulated over a lifetime are properly managed and taxed. However, the path to RMD compliance is fraught with potential missteps that could significantly impact your financial well-being.
For those who just turned 73 in 2024, you have until April 1, 2025 to make your 2024 RMD. Luckily, there’s also an exception for those who are still working and own less than 5% of the company.
But if none of these things apply to you, note that December 31 is your deadline. Here’s a guide to the process so you can avoid the four costly RMD mistakes that could derail your finances this year.
As we approach 2025, those aged 73 and older must take required minimum distributions (RMDs) from their retirement accounts before December 31, unless they meet certain exceptions. Image source: Pexels / Kampus Production.
1. Failing to withdraw the full RMD amount
The first mistake to watch out for is not taking your full RMD.
The Internal Revenue Service (IRS) mandates these withdrawals because they want to collect taxes on your retirement savings during your lifetime. If you withdraw less than the required amount, you'll face a steep penalty of 25% on the amount you were required to withdraw.
For instance, if your RMD was $5,000 and you only took out $4,000, you'd owe a $250 penalty on the $1,000 you didn't withdraw. While you can reduce this penalty to 10% by rectifying the error within two years, it's best to avoid this costly mistake altogether.
You would have a better experience with withdrawing the funds and paying the taxes (or doing a QCD, described below) instead of avoiding RMDs altogether.
2. Not withdrawing from each of your 401(k)s
For those with multiple retirement accounts, it's crucial to understand the rules for each. While you can aggregate all your IRA RMDs and withdraw the total amount from one IRA, this isn't the case with 401(k)s.
Each 401(k) account requires an individual RMD withdrawal. Neglecting to take an RMD from any 401(k) will result in a penalty on the amount you failed to distribute.
Remember, if you're still working and own less than 5% of the company, you may be able to delay RMDs from your current employer's 401(k), but not from IRAs or 401(k)s from previous employers.
IRAs also have a special rule that allows you to take all of your IRA RMDs from a single account, if you’d prefer. For example, if you have two IRAs, one with $5,000 in RMD and another with $7,000 RMD, you may take $12,000 from one, $6,000 separately, or any combination you’d prefer as long as you withdraw a minimum of $12,000 from your IRAs within the year.
3. Misunderstanding Roth account rules
A common misconception is that Roth accounts require RMDs. As of this year, both Roth IRAs and Roth 401(k)s are exempt from RMDs. This is because Roth accounts are funded with after-tax dollars, and withdrawals are generally tax-free.
The IRS has no reason to mandate distributions from these accounts. However, you're free to make withdrawals if you wish, and doing so can be strategically beneficial if you're close to a higher tax bracket, as Roth withdrawals won't increase your taxable income.
4. Confusing RMDs with Qualified Charitable Distributions (QCDs)
The fourth mistake to avoid is taking your RMD and then donating it to charity, rather than directly making a Qualified Charitable Distribution (QCD). A QCD allows you to transfer funds directly from your retirement account to a qualifying charity, satisfying your RMD without increasing your taxable income.
This is different from taking an RMD and then donating it, which could raise your adjusted gross income (AGI) and limit your charitable deduction based on your AGI. Remember, the maximum QCD for 2024 is $105,000, and it's only available to those 73 and older.
Some differences to take note of are:
- If you donate on your own, you need to itemize deductions to claim a tax benefit, which might not always be ideal. With Qualified Charitable Distributions (QCDs), you can still benefit even if you take the standard deduction.
- Taking the Required Minimum Distribution (RMD) yourself adds to your taxable income, increasing your adjusted gross income (AGI). While a regular charitable donation can offset some of this, a QCD avoids increasing your AGI altogether.
- Regular charitable deductions are limited by your AGI and the type of charity you support. QCDs bypass these limits, letting you potentially donate more and lower your taxable income further.
While on the subject of RMDs, you might want to learn how to maximize your retirement funds through strategies you can definitely benefit from. Read more about these tips in this story here.
Have you encountered challenges with RMDs, or do you have strategies that have worked well for you? Share your experiences and insights in the comments below!
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