What Are the Most Common RMD Mistakes?
The first most common RMD mistake is failing to take the distribution entirely. As the IRA account holder, you are responsible for taking your RMD. Your custodian should tell you about your requirements and your CPA may remind you, but it is your responsibility to take your RMD annually.
Your custodian will provide you with the amount that you are required to take annually. The calculation is based on a life expectancy table. They take this table and the value of your IRA from the prior December 31st market value to determine your RMD. This amount starts out at about 4% of the market value and the percentage goes up annually.
The second most common mistake is failing to take out the proper amount of the RMD. If your RMD was $30,000 and you only took out $20,000, the shortfall of $10,000 would be subject to either the 25% or 10% penalty addressed below.
The third most common mistake is the failure to take an RMD on an inherited IRA. Prior changes to the tax law eliminated the ‘stretch IRA.’ As a result, many inherited IRAs must either be distributed annually over a 10-year period or fully distributed by the end of the tenth year, depending on the circumstances. This has caused some confusion for folks that have an inherited IRA.
Failure to take your RMD will result in an IRS penalty of 25% of the amount that should have been distributed. If this error is corrected within two years, the penalty amount can drop down to 10%. Either way, these are stiff penalties. Make sure you take out the correct RMD to avoid any penalties.
What Are Some Planning Opportunities?
Roth Conversions Before RMDs Are Required
Some individuals should consider partial annual Roth conversions before their RMD is required. RMDs are required by April 1st of the year following the year you turn 73.
Some people may want to consider doing Roth conversions before the RMDs are required. A Roth conversion is when you take money out of an IRA, tax it, and convert it into a Roth IRA. It is helpful to have the cash to pay the tax from another source.
For example, if you wanted to convert $20,000, and we assumed your tax bracket is 20%, that would result in $4,000 of income tax. To convert the entire $20,000, you would need to have $4,000 from another source to pay this tax.
You would consider this if you were in your late 50’s or anytime in your 60’s and your income was down. Perhaps you retired early. Perhaps you went from working full-time to part-time. Whatever the reason, if your income is down and you have the funds from another source, consider doing partial, annual Roth Conversions.
We wrote about this previously in Practical Reasons for Partial Annual Roth IRA Conversions.
Should You Delay Your First RMD Until April 1st of the Following Year?
No, you should generally not delay your first RMD until April 1st of the following year. Although your first Required Minimum Distribution (RMD) can generally be delayed until April 1 of the year following the year you turn age 73, doing so may not always be the best strategy.
If you delay your first RMD until April 1, you’ll still need to take your second RMD by December 31 of that same year. This creates a timing issue.
Taking two distributions in one year has multiple consequences. It could increase your taxable income and push you into a higher tax bracket. It may also increase Medicare premiums through IRMAA surcharges.
Before delaying your first RMD, consider reviewing the tax consequences with your financial advisor and tax professional. In some circumstances, taking the first RMD during the year you turn 73 may be the better choice.
QCD Planning Beginning at Age 70 ½
Charitably minded people should consider a Qualified Charitable Distribution (QCD) beginning at age 70 1/2. A QCD is when you make a distribution from your IRA to a qualified charity. A qualified charity is one that is allowed to accept tax-deductible charitable donations, including 501(c)(3) organizations.
You cannot claim a tax deduction for a QCD. The QCD amount is not included in your taxable income.
If done properly, the QCD will count towards your RMD.
Although you are not allowed an income tax deduction for your QCD, by not having it included in your taxable income is positive. This will decrease your Adjusted Gross Income (AGI). This will decrease your Federal and State of Connecticut Income Tax. It may also decrease the taxable amount of your social security and, if you itemize, may allow you to deduct a portion of your medical bills.
For 2026, the maximum amount that can be distributed through a QCD is $111,000, per person, per account. This annual amount is indexed to inflation, and the 2027 maximum amount has not been published by the IRS presently.
We wrote about this previously in IRA Giving After Age 70 ½: How to Make a Qualified Charitable Distribution.
How Do RMDs Affect IRMAA and Tax Bracket Management?
RMDs can affect IRMAA and tax bracket management. IRMAA stands for Income-Related Monthly Adjustment Amount—a surcharge added to your Medicare Part B and Part D premiums based on your income. The higher your income, the more you will pay for your Medicare premiums.
Large IRA balances create larger RMDs. These can increase your taxable income and potentially push you into a higher tax bracket.
Because Medicare uses a two-year lookback, the income decisions you make today may affect your Medicare premiums two years from now. For 2025, IRMAA surcharges are projected to begin when your Modified Adjusted Gross Income (MAGI) exceeds $111,000 as a single filer, $222,000 for married taxpayers filing jointly. This would be effective for your Medicare Premiums for 2027.
Tax bracket management is key. This is where we would suggest that you look at your income tax bracket over a rolling 10-year period. We wrote about this previously in 3 Practical Ways to Minimize Your Lifetime Tax Bill. This becomes key as a pre-retiree and a retiree. There are several milestones and decisions that will affect your income tax bracket.
Some of the questions you will need to address are:
When will I retire?
When will I begin collecting Social Security?
Will I need or want to withdraw from my IRA?
Conclusion
If you need help avoiding common RMD mistakes and identifying your planning opportunities, call Thomas Scanlon at (860) 645-1515 or email Thomas.scanlon@raymondjames.com.
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Changes in tax laws or regulations may occur at any time and could substantially impact your situation. While familiar with the tax provisions of the issues presented herein, Raymond James Financial Advisors are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Investing involves risk and investors may incur a profit or a loss.
Contributions to a traditional IRA may be tax-deductible depending on the taxpayer’s income, tax-filing status, and other factors. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, maybe subject to a 10% federal tax penalty.
Like traditional IRA’s, contribution limits may apply to Roth IRA. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Roth IRA owners must be 59 1/2 or older and have held the IRA for five years before tax-free withdrawals are permitted.