You’ve spent decades saving for retirement, but one small mistake could cost you thousands of dollars. The rules, deadlines and tax implications of retirement accounts like IRAs and 401(k)s aren’t always obvious. When these rules are violated, penalties can be severe. This article highlights a common retirement account mistake that continues to catch retirees off guard and how to avoid it until it’s too late.
Missed the Required Minimum Distribution (RMD) Deadline
Once you reach age 73, the IRS requires you to withdraw a minimum amount each year from a traditional IRA or 401(k). If you miss the deadline (even by a day), you may face a penalty of 25% of the amount due to be withdrawn. This was more than just a minor punishment, it was a financial blow.
Many retirees don’t realize they need to withdraw RMDs from every qualified account. Others think their financial advisor or plan administrator will handle it automatically. But the responsibility ultimately falls on you. If you have multiple accounts, the rules can get confusing. IRAs can be rolled up into RMDs, but 401(k)s must be calculated and withdrawn separately.
tax trap
RMDs are considered taxable income. If you forget to claim it and then rush to withdraw a large amount, you could slip into a higher tax bracket. That means you’ll pay more taxes on your Social Security, investment income, and even Medicare premiums. Planning ahead can help you avoid this domino effect.
If you inherit an IRA, the rules are different and often misunderstood. Non-spousal beneficiaries generally must withdraw the entire balance within 10 years. Failure to do so may trigger penalties and tax consequences. Many heirs don’t realize they need to pay RMDs and end up receiving an unexpected bill.
Confusing Roth and Traditional Rules
Roth IRAs do not require RMDs during the lifetime of the original owner, but Roth 401(k)s do. This caught many retirees off guard. If you don’t roll your Roth 401(k) into a Roth IRA before retirement, you may be forced to make unnecessary withdrawals. This is a simple fix that is often overlooked.
Do not update beneficiaries
Outdated beneficiary designations can lead to legal complications and missed opportunities. If your spouse dies or your children change their names, your retirement accounts may be distributed in ways you don’t want. This won’t directly affect your spending, but it could cause confusion for your heirs.
Forget old account
Many retirees have multiple retirement accounts from previous jobs. If you forget one of these, you may miss its RMD and face penalties. Merging accounts or setting reminders can help you meet your obligations.
Automatic withdrawals are helpful, but they are not foolproof. Changes in account value, tax laws, or your age may affect the amount of your RMD. You need to review your policy annually to ensure compliance. Blind trust in automation can lead to costly mistakes.
One mistake can wipe out your savings
Retirement accounts are powerful tools, but they come with strings attached. Missing an RMD or misunderstanding the rules can result in fines, taxes and reduced revenue. Good news? These mistakes are preventable. With some planning, regular checkups, and professional guidance, you can protect your savings and enjoy the retirement you deserve.
Have you ever experienced retirement account chaos, or have you found a strategy that works? Share your experience in the comments.
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