It seems simple enough: If you're at least age 70 ½, you must annually withdraw a specified amount—a required minimum distribution (RMD)—from your retirement accounts. But it's all too easy to make a mistake that has serious financial consequences.

Key Takeaways

  • Generally, if you're at least age 70 ½, you must take required minimum distributions (RMD) from your retirement accounts by Dec. 31 each year.
  • If you withdraw less than the RMD amount by the deadline, you will owe the IRS an excise tax of 50% of the shortfall.
  • A common RMD error is paying distributions for both spouses from one spouse's account.

Required minimum distributions are preceded by a number of calculations and classifications. Make an error on any of them and you could withdraw less than is required—and trigger one of the stiffest tax penalties in the book. The IRS imposes an excise tax of 50% of any shortfall amount.

Because of that risk, advisors often suggest erring on the side of caution when it comes to distributions by taking out a little more than the calculated amount. Liberate too much from your accounts, though, and you might face a higher tax bill and limit your nest egg in the long run.

Here's a rundown of some common RMD errors and the trouble—usually tax-related—they can cause.

1. Delaying Your First RMD

As a rule, you must take RMDs by December 31 each year. But appreciating that new "distributors" may need extra time to prepare for the withdrawal process, the IRS lets you defer your first RMD to as late as April 1 following the calendar year you turn 70 ½. While that may be convenient, it might not be in your best financial interest.

Holding off on that first payment means you have to take two RMDs in less than 12 months—the one you held over to the end of March, and the regular one due on December 31.

If your accounts, and thus their RMDs, are fairly large, "that means potentially two sizeable taxable withdrawals in the same year," says Carol Berger, CFP®, Berger Wealth Management, Peachtree City, Ga. "This could bump [you] into a higher tax bracket," Berger points out, and possibly subject you to the Medicare surcharge, depending on your modified adjusted gross income (MAGI).

In such a scenario, Berger recommends foregoing the extension. Instead, she says, spread the withdrawals over both years by taking your first payment by December 31 of the year you turn 70 ½.

2. Using an Incorrect Fair Market Value

The RMD for a year is determined by dividing the previous year-end's fair market value (FMV) for your retirement account by the applicable distribution period. This is based on your age, and you can find it on the IRS-issued life expectancy tables

The custodian of your retirement accounts usually provides a report of your FMV by Jan. 31 of the following year. However, it can complete that task only with the information it has at hand.

That documentation is sometimes lacking, says Jillian C. Nel, CFP®, CDFA, director of financial planning at Legacy Asset Management, Inc., Houston, Texas. "If there is limited information on the year-end value (i.e., lost statements, movement of accounts, hard-to-value assets within the portfolio), this calculation can be challenging."

Your RMD might also change if you make relevant changes after your FMV was calculated, based on year-end information. Such late changes are now less common, due to changes introduced in the Tax Cuts and Jobs Act of 2017.

That legislation banned one of the most common such maneuvers: recharacterizing a Roth IRA to a traditional IRA to avoid the Roth becoming subject to tax. Nonetheless, let your custodian know of any transactions within the year that could conceivably affect the RMD you're required to make by year-end.

3. Mixing Plan Types to Meet RMDs

If you have multiple IRAs or 403(b)s, you're allowed to combine the RMDs from the same type of account and take a single distribution from one of the accounts. You're not permitted, though, to withdraw an RMD for an IRA from a 403(b), or vice-versa. And you can't exercise such consolidation when it comes to 401(k)s.

Regardless of account type, you can't reach across your portfolio and take RMDs required for one type of retirement account from a different type of account.

RMDs and Inherited IRAs

With inherited IRAs, you're allowed to combine RMDs for multiple inherited/beneficiary IRAs you received from the same decedent—and then withdraw the total from just one of those accounts. But you cannot combine RMDs from IRAs you inherited from several decedents.

Also, you can't take the distributions for inherited IRAs from traditional IRAs that you own. To illustrate this, here's an example. Sam inherited an IRA from his Aunt Suzie. The RMD amount for the inherited IRA is $6,000. Sam has his own IRA, for which the RMD amount is $10,000.

Sam cannot combine the two RMD amounts—one from his account, one for the inherited one—and withdraw from only one. Each RMD must be withdrawn from its respective account.

RMDs and Roth IRAs

Note, too, that there are different rules for distributions for Roth IRAs that are inherited (Roth IRAs don't have RMDs during the original owner's lifetime). As in, distributions may be required. "Roth IRAs for individual participants are not subject to RMDs, but inherited Roth IRAs are," notes Marguerita M.Cheng, CFP®, RICP®, CEO of Blue Ocean Global Wealth, Gaithersburg, MD.

However, if the Roth is inherited from a spouse, the RMD requirement does not apply. With an account you inherit from someone else, you'll face several distribution options, the best of which is the Term Certain Method.

RMDs and 401(k)s

If you have multiple 401(k) plans, the RMDs cannot be taken from just one of those plans. "If you have 401(k) plans from former employers, you would need to take RMDs on those, and, unlike IRAs, you would need to calculate the RMD for each plan and take that amount from each account," says Fred Leamnson, ChFC, founder and president of Leamnson Capital Advisory, Reston, Va.

4. Combining RMDs With Your Spouse

Many financial assets may be held jointly by a married couple, but retirement accounts are not among those. These must be owned individually. That individual responsibility also applies to taking RMDs.

Unfortunately, couples often miss this distinction, especially if they file taxes jointly. Since they file a single combined tax return, they assume—wrongly—that an RMD taken from one spouse's retirement account will satisfy the RMD on the other's account.

Let's say you and your spouse both face distributions, and you decide to simply take the entire combined amount of those RMDs out of your spouse's IRA. Taking your RMD from your spouse’s IRA leads to a host of tax consequences, none of them good.

If you miss an RMD, you will owe up to a 50% excise tax on any amount you should have withdrawn.

In the eyes of the IRS, you've missed taking your RMD. The agency will impose up to a 50% excise tax on that RMD amount. Meanwhile, your spouse will have "over-distributed" by taking more from her account than was necessary, which likely means paying more taxes.

Since RMDs are considered to be income, she might also wind up owing more in Social Security and Medicare premiums based on her higher income.

The Bottom Line

After saving for years—or decades—you eventually have to start withdrawing the money in your retirement accounts and pay taxes on it. In general, you must start taking RMDs at age 70 ½, and the stakes are high—financially speaking—if you make a mistake.

If you need help figuring out your RMDs, or taking them on time, it's a good idea to speak with a trusted financial advisor or tax accountant who can help guide you through the process—and avoid any mistakes.