Building up your retirement savings takes decades of hard work, and one misstep when it comes to required minimum distributions can cause you massive penalties. Today, I’m going to share with you the most common mistakes that people make when it comes to required minimum distributions, how to avoid them so that you can avoid those massive penalties and you can protect your savings.

So for any of you who may be confused on required minimum distributions and survey says most people are a little bit confused because there’s so many rules, there’s so many changes, there’s so many gotchas, let me give you just a brief overview. Current law says that if you’re turning 73 this year, you have to begin to take required minimum distributions out of IRAs and 401(k)’s. Okay. Required, you must take them out. Minimum, there’s a minimum you must take out, and distribution, it must come out just exactly like it says. They’re commonly referred to as RMDs. So if I refer to that, that’s what I’m talking about. This happens at 73. Now, it’s never a percentage. Okay. Get that clear. You can calculate the percentage each year, but the amount that comes out each year is determined by your age and by a table that’s based on life expectancy. So every single year, that table changes because as you get older, there’s a different life expectancy. There’s a different factor that you divide into the amount of money that’s in your account. It is very confusing. People do make mistakes because of the confusion.

Now, let’s stack something on top of that. In the past four years, they’ve changed the age that you have to start taking required minimum distributions. When earlier I said 73, some of you may have been shocked because you said, “I thought it was 70 1/2,” and you’re right, it was 70 1/2. Some of you may have said, “Well, I heard it was 72.” You’re right, it was 72, and all of these changes have come within the past 4 years. So let’s get something settled. If you were born in 1951 or earlier this year, you to take required minimum distributions. So let’s jump into the mistakes.

Number one is missing the deadline. As I just said, when you turn 73 that year, you have to take required minimum distributions. When do you have to take them? What is the deadline? Well, for some reason they say the first year you can wait from the year that you’re 73. Don’t get confused here, just try to follow me because it’s confusing. In the year that you turn 73, you can wait until April 1st of the following year to take your first required minimum distribution. And a lot of people get confused on that because they miss that deadline. They overlook their age. It has changed a couple of times in the actual age, in the past four years, so a lot of confusion and people just let it slip by and maybe you’re not thinking as well as you did when you were 24, when you’re 74 or 73, and so therefore you make a mistake and you miss the deadline, whether it’s the end of the year or April 1st of the following year. Big mistake. You don’t want to make that mistake.

And here’s the problem. Most of the big box firms that are out there solve their required minimum distribution obligation by telling you on page three or page four or page five of your annual statement from the previous year, how much you owe in required minimum distributions. No phone call, no meeting, no party, like some people have. We have a required minimum distribution party and tell everybody that 73, you got to take them out this year, but you miss the deadline, you’re over and you have to pay a penalty.

So what is the penalty for missing the deadline? 25% excise tax, extra tax. You get taxed on what you should have taken out, you get penalized because of the IRS rule that if you don’t do it in a timely manner, you get a little penalty for the time that you didn’t do it, and then you get an excise tax of 25% of whatever you are supposed to take out. For instance, if you were supposed to take out $10,000, you get taxed on it when they find out, penalized for not doing it in a timely manner, and then an extra $2,500 is taxed to you because you didn’t do it and you missed the deadline.

The second reason people mess up when it comes to RMD’s, required minimum distributions, is they don’t use the right amount. What amount do you use? Well, the amount for this year that you have to take out of an IRA… Let’s just give you one right now for this illustration. The amount you have to take out of your IRA this year is based on the amount that was in that IRA on December 31st of last year. I mean, that’s the point. The market could go up, the market could go down, doesn’t matter. Doesn’t matter what it is on February 1st, March 1st, December 1st, when you finally decide to take your RMD out, it matters what it was on December 31st of the previous year. So that’s a fluctuating amount with almost every account up, down, sideways, particularly if it’s invested in the market. So if you don’t take out the right amount, you could be taking out too much, which costs you the money that’s still in your account, or you could be taking out too little, which results in a tax penalty, a late penalty, and then an excise penalty of 25%.

The third reason that you could mess up when it comes to taking your required minimum distributions is you don’t take the right amount from the right account, just to make it rhyme just a little bit there. Or you take the wrong amount from the wrong account. If you have multiple IRAs or multiple 401(k)’s, or you have a 401(k), and an IRA, every pre-tax or qualified account has an amount that needs to come out that year. Now, here’s another confusing issue, taking the wrong amount from the wrong account. If you have three IRAs, you can add up what needs to come out of each one of them, and you can total it and take all of it out of either one of those accounts, or you can take the same amount that’s needed out of each account, so it’s confusing. You can aggregate those and take one amount out of one account.

But if you have more than one 401(k), and don’t laugh, some people do. Okay. And you have two 401(k)’s. Then you’ve got to take something out of each of those 401(k)’s. You cannot aggregate your 401(k)’s and take the total amount out of one of them. You cannot aggregate a 401(k) that you might still have and an IRA that you have. Something would have to come out of the IRA and something would have to come out of the 401(k). So again, they’re like playing what I used to call the game Whac-A-Mole at Chuck Cheese’s when my kids were little. It’s like boom, boom, boom. It’s like they’re standing over you waiting for you to step out of line, boom, boom, boom, and you just whack whatever pops up and they whack wherever you’re out of line. And a lot of people take the wrong amount out of the wrong account, and it ends up resulting in a penalty.

Number four is not being strategic with how you take your RMD and what account when it comes to tax planning you’re using. Now, what we like to do is do a lot of tax planning before you get to 73. So if you’re 63, 65, 66, and you’re listening to this, and the sad thing is most brokers don’t want to do a lot of tax planning with you, but you need to find a broker or an investment advisor, or particularly a financial planner, where they will look at your tax burden that you’re going to have throughout your entire retirement and maybe help you get prepared for that before you actually get to 73.

But when you get to 73, and let’s say, I’ve seen people do this, they needed $30,000 earlier in the year. So they took out 30,000 from an after-tax account that they didn’t have to pay tax on the income, which was good, but then they didn’t need the RMD later, the required minimum distribution amount, and it was 30,000 and they had to take it out. It was demanded that they take it out that year. So here they take out the $30,000 and they pay tax on it, and they’re 30,000 short over in their other account. So you understand what I’m saying? You need to coordinate your after-tax accounts with your pre-tax accounts. These need to take out the RMD. These do not, and you don’t want to deplete both of them if you don’t have to. So doing the right amount of tax planning, even if you haven’t done it up to the time of RMDs of 73, but doing tax planning and where you take your money and when you take your money could really make a difference.

Here’s where it makes a difference. If you take more than you need to take out of the IRAs or the 401(k)’s, it could push you up because it comes out as regular income. It could push you up into a higher tax bracket and result in a lot more just regular income tax. Even if you don’t get penalized, you penalize yourself by pushing yourself into a higher tax bracket. You need to know the tax qualification of everything you take out of any of your accounts in retirement, but particularly when you reach 73 and you’re having to deal with RMDs.

So you’re sitting here, you say, “Tom, this was confusing on number one. Number two got worse, number three got worse.” Yeah, I get it. I understand. That’s why we and all of my advisors at Mosley Wealth Management work with people on tax planning, and we try to say, “What kind of tax are you going to pay if you use the government’s plan? And what kind of tax are you going to pay if you develop your own tax plan and you pay it in your time, the way you should, rather than in their time when they want it, when they want their amount?” Guess which one you pay more? Yeah, you’re absolutely right. Unlike a lot of people that are out there working with people in retirement, we are willing to help you do tax planning when it comes to required minimum distributions.

Number five is sadly, for forgetting to take RMDs after a spouse’s death. I mean, let’s face it, I’ve done this 29 years. I’ve gone through death with a lot of surviving spouses, and most of the time they’re shell shocked. I mean, I used to say when I was in the ministry and I would speak at a funeral that whether death slams the front door in and takes an 18-year-old out of the prime of life when they’re just starting their life, or whether death comes and takes an 81-year-old at the end of a long illness, death still is a shock. And for somebody who’s been married to someone for 40, 50, 60 years and then all of a sudden they’re without them, they’re shell shocked for a while.

And I encourage people, don’t make any decisions unless you have to make those decisions for the first 60 days or 90 days and make sure when you do, you have some member take that and help you make that decision. Now, let’s bring it into the RMDs. So many times people have an IRA for the husband, an IRA for the wife, husband passes away, the wife forgets to take the IRA distribution for the husband. Unfortunately, the IRS is pretty unforgiving. They’re going to penalize you for that. So when you’re going through a time, and here’s what I’ve seen several times too. Let me give you for instance, this person has just gone through a horrible illness right up close to the end of the year, and maybe they pass away in December and they’ve forgotten because they weren’t of the mind to take… When you’re passing away and you’re dying of some illness, you’re not thinking about your RMDs, your required minimum distribution.

Once you pass away in November or December, your spouse is not thinking about required minimum distribution. Trust me, there are other things that are more important for you to be thinking about. Well, you go past December 31st, and you’re in the penalty phase of required minimum distribution. So make sure, and I am so sorry for you if you’ve suffered a loss recently, but make sure you’re covering the required minimum distribution for any spouse who’s 73 or older when they pass away. If not, IRA could cost you a penalty.

We’re talking about required minimum distribution mistakes, and if you’re still working and you’ve turned 73 and you’re contributing to a 401(k), there’s a special exemption for you. Unless you own more than 5% of the company. If you own your own company, you’re contributing to your 401(k), that’s got to stop at 73, and you’ve to start taking required minimum distributions out, if you own more than 5% of your company. If you don’t own more than 5% of your company and you’re still working at 73, you can still contribute to your 401(k), and you can still not pay required minimum distributions until you get to the end of your employment, and then you begin to pay required minimum distributions at that point.

So let’s say you work until you’re 78, 5 more years, no RMDs on your 401(k) during that time. Be careful if you’ve got another IRA sitting over here, the IRA is going to require a required minimum distribution. If you’ve got two IRAs, it’s going to require a required minimum distribution, even if you’re still working. But your active 401(k), if you own less than 5% of the company, is not going require a required minimum distribution until you stop work. Be careful one other time. Another game, remember the Whac-A-Mole game, they’re going to get you some way.

If you stop in October, you get it? Then you’re going to owe required minimum distribution for that year. So you could work from January to October, be 78 years old, retire on your 78th birthday, and you’re still going to have to pay required minimum distributions because for 3 months that year you did not work. Be careful. It’s a big gotcha.

Okay. Seven is the biblical number of completion. So let’s complete this with number seven. Not using your required minimum distribution for charitable contributions. If you are 70 1/2, you are eligible to do a qualified charitable distribution, a QCD. No, that’s not a shopping channel on your television. That is a way… Now, watch this. You take whatever you’re supposed to take in RMDs, required minimum distribution, you give the entire amount to a qualified 501(c)(3) charitable organization. They get the full amount, you get the full charitable deduction for that, and you get credit for the required minimum distribution. It’s a win-win-win, the only one who loses, the federal government.

So we better take advantage of this until they find out what they’re doing to themselves. But a qualified charitable deduction might be a way, particularly if you give money to a charitable organization like a church or a society or anything that’s a 501(c)(3). If you give a large amount of money and you’re over 70 1/2, you probably could give more money and solve your required minimum distribution issue by doing a QCD, a qualified charitable distribution, to that charitable organization.

But required minimum distributions don’t have to be a point of stress, but you have to be meticulous in how you do them. That’s why we encourage you to work with somebody who’s a financial planner, who trains this, who does this every day with multiple people, and who has done this thousands of times with people. You’re only going to do it once. If you ever mess up, you’ll never make that mistake again, but you might make a second mistake along the way because there’s so many of these Whac-A-Moles, where they’re going to get you along the way.

Hey, talk to your financial planner. Talk to us if you want to find out information from us or you’d like to meet with one of us, we stand ready to help you with required minimum distributions. We feel like the money that’s in your qualified plans, your 401(k) and your IRAs, you need to pay everything you’re legally required to pay, when you’re required to pay it, the way you’re required to pay it, but not a penny more, and particularly not any kind of penalty more. Hey, if you like this program, you want to delve a little bit more into taxes in retirement, click on the Taxes in Retirement video, and you can see an entire other presentation that we’ve had on taxes in retirement.

So until next time. I’m Tom Mosley. If you give me 8, 10, 12, 15 minutes, I promise to do my best to increase your financial knowledge. And if you want to get in touch with us, you want to ask us a question, you want to meet with us so that maybe we can help you because maybe you say, “The person I work with doesn’t do any of the things you talked about in this video today,” hey, give us a call. You can contact us at the Mosley Wealth Management, the website, www.mosleywealthmanagement.com There’s a place where you can schedule a time for us to meet with you, either in person, by Zoom, or on the phone. We’d love to help you in any way we can.