Retirement & Tax Planning Answers
What Is the Biggest RMD Mistake to Avoid?
Quick answer
The single biggest RMD mistake is waiting until required minimum distributions actually start to think about them. By age 73, a traditional IRA or 401(k) balance is what it is, and the annual forced taxable withdrawal is locked to that balance and the IRS life expectancy table, whether or not it fits your tax situation. Retirees who spend their 60s doing nothing about a large pre-tax balance lose the one window, the years between retirement and age 73, when Roth conversions and strategic withdrawals could have shrunk that balance while their tax bracket was lower. Once RMDs begin, the remaining mistakes are execution errors: taking the first-year delay without modeling the double RMD it creates, under-withholding, missing a 401(k)'s separate RMD requirement, and missing the December 31 deadline outright.
RMDs are not really a 73-year-old's problem. They are the final bill for decades of tax deferral, and the size of that bill is set almost entirely by decisions, or non-decisions, made in the 55-to-73 window. A household in Chandler or Peoria with $1.8 million in a traditional IRA at age 62 who does nothing but let it grow will likely be looking at a first-year RMD north of $70,000 by age 73, all taxed as ordinary income, all stacking on top of Social Security. The same household that spends the low-income years between retirement and 73 converting a portion to Roth each year can materially shrink that number, because every dollar converted before 73 permanently exits the RMD calculation.
That's the strategic mistake. The execution mistakes are smaller individually but still add up to real money. The first is electing the one-time delay of the first RMD to April 1 of the year after turning 73, without realizing that choice forces two RMDs into that same calendar year, the delayed one and the regular one. Stacking two years of forced income into one tax year routinely pushes retirees into a higher bracket and across an IRMAA threshold they would have avoided by simply taking the first RMD on time.
The second execution mistake is under-withholding. Most custodians default to withholding 10% for federal taxes unless a retiree specifically requests more. For a retiree in Scottsdale or Phoenix whose RMD stacks with Social Security and pension income into the 22% or 24% bracket, that 10% default withholding is not close to what's actually owed, and the shortfall shows up as an underpayment penalty or an unpleasant surprise at filing.
The third is a structural misunderstanding: IRA required distributions can be aggregated and taken from any combination of IRAs, but each 401(k) or 403(b) must satisfy its own RMD separately. Retirees who worked in Tucson or Paradise Valley for multiple employers and left several old 401(k)s behind sometimes assume that taking a large enough IRA distribution covers everything. It doesn't. Each 401(k) has to be handled on its own.
The fourth is simply missing the December 31 deadline. This sounds obvious, but it happens constantly, especially in a year with a move, a health event, or a holiday-season distraction. The penalty for a missed RMD is a 25% excise tax on the shortfall, reduced to 10% if corrected within two years, and it is entirely avoidable with a calendar reminder and a custodian instruction set up in advance.
The fifth is not using a Qualified Charitable Distribution when charitable giving is already part of the plan. For IRA owners 70½ and older, up to $111,000 per year given directly from the IRA to a qualified charity counts toward the RMD but is excluded from taxable income and from the MAGI calculation that drives IRMAA. Retirees who give to charity anyway and still take the full RMD as cash, then write a separate check to the charity from after-tax dollars, are paying tax on money that didn't need to be taxed at all.
If you are more than five years from your first RMD, the highest-leverage move is modeling what your pre-tax balance will grow into by 73 and deciding, now, whether a multi-year Roth conversion plan makes sense while you still control the timing and the tax bracket.
If your first RMD is already here or close, the execution mistakes are what to guard against: don't take the first-year delay without modeling both years together, set withholding based on your actual expected bracket rather than the custodian default, confirm every 401(k) is satisfying its own requirement, and calendar the December 31 deadline well before year-end.
- Reaching age 73 having done nothing in the prior decade to shrink a large pre-tax balance through Roth conversions.
- Electing the first-year April 1 delay without realizing it creates two taxable RMDs in the same calendar year.
- Accepting the custodian's default 10% withholding instead of setting it to match the actual marginal rate the RMD will be taxed at.
- Assuming a large IRA distribution covers RMD requirements on old 401(k)s from prior employers, when each plan must satisfy its own RMD separately.
- Taking the full RMD as cash and writing a separate check to charity, instead of using a Qualified Charitable Distribution to exclude the gift from taxable income.