Mistake 1: Missing an RMD Deadline
Forgetting to take your RMD by December 31 triggers a 25% penalty on the missed amount (reduced from 50% by SECURE 2.0). On a $30,000 missed RMD that is a $7,500 penalty. The only saving grace: if you correct it within the IRS two-year correction window (generally by filing Form 5329) the penalty drops to 10% — still $3,000 on a $30,000 RMD.
RMD mistakes and their costs and fixes
| Mistake | Penalty or Cost | Fix |
|---|---|---|
| #1 Missed RMD deadline | 25% of missed amount ($7,500 on $30K) | Take corrected RMD + file Form 5329 for penalty reduction |
| #2 Wrong balance used for calculation | Under- or over-withdrawal | Use Dec 31 prior-year statement balance always |
| #3 No withholding on RMD | Underpayment penalty + surprise tax bill | Withhold taxes from RMD or make estimated tax payments |
| #4 Taking RMD too early in year 1 | Creates income in the wrong year | Take first RMD by Dec 31 of age-73 year to avoid double year |
| #5 Forgetting an IRA account | Shortfall = 25% penalty | List all accounts annually; verify against previous year |
| #6 Converting + RMD in same year | Very high combined income year | Separate conversion and RMD years when possible |
| #7 No estate plan for remaining IRA | Heirs pay full tax on 10-year accelerated distribution | Execute Roth conversion or use QCDs to reduce balance |
Mistake 3: Not Withholding Taxes From Your RMD
RMDs are taxable as ordinary income. If you take $35,000 in RMDs without withholding any taxes you owe those taxes at filing — plus potentially an underpayment penalty if you have not made quarterly estimated payments. Always request tax withholding from your RMD: 22%-32% depending on your bracket.
Custodians automatically withhold 10% from IRA distributions unless you request otherwise. 10% is almost always insufficient for RMDs which fall in 22%+ brackets for most retirees with significant retirement income. Request 20%-30% withholding or make quarterly estimated tax payments to avoid penalties.
RMD withholding recommendations by effective tax rate
| Effective Tax Rate | Recommended Withholding | On $40K RMD: Tax Owed | Penalty if Under-Withheld |
|---|---|---|---|
| 12% | 12%–15% | $4,800 | Minimal |
| 22% | 20%–25% | $8,800 | ~$150 if underpaid significantly |
| 24% | 22%–27% | $9,600 | ~$200 if underpaid significantly |
| 32% | 30%–35% | $12,800 | ~$300 if underpaid significantly |
Mistake 7: No Estate Plan for Remaining IRA
The IRA that you do not fully spend goes to heirs who must withdraw within 10 years under SECURE Act rules. A $500,000 traditional IRA forced into a working-age heir’s income over 10 years creates $50,000/year in added taxable income — potentially at 32%+ rates. Converting to Roth during the owner’s lifetime gives heirs a tax-free inheritance instead.
- Set a December 1 annual calendar reminder to verify RMDs are on track for December 31 deadline
- Withhold 20%-30% from all IRA distributions unless you have a very low tax rate
- List all traditional IRA accounts annually and calculate each separately
- Separate RMD years from Roth conversion years whenever possible to avoid bracket stacking
Audit Your RMD Strategy for Costly Mistakes
Enter your accounts and income to verify your RMD calculation and tax withholding are correct.