It seems simple enough: If you're at least age 70½, you must annually withdraw a specified amount—a required minimum distribution (RMD)—from your retirement accounts. Yet that distribution is preceded by a number of calculations and classifications. Make an error on any of them and you could withdraw less than is required, triggering one of the stiffest tax penalties in the book: an IRS excise tax of 50% of the shortfall amount.

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

Key Takeaways

  • Generally, retirement account owners who are at least age 70½ must withdraw required minimum distributions (RMD) from their retirement accounts by Dec. 31.
  • Those who withdraw less than the RMD amount by the deadline will owe the IRS an excise tax of 50% of the shortfall.
  • Common errors that cause shortfalls in RMDs include paying distributions for both spouses from one spouse's account.

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

1. Delaying Your First RMD

As a rule, you're required to make your RMD by December 31 of every year. But appreciating that new "distributors" may need extra time to prepare for the withdrawal process, the IRS allows you to defer your first RMD to as late as April 1 of the next year. While that might be convenient, it may not be in your best financial interest.

Holding off on that first payment means you'd have to take two RMDs within 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," she points out, and possibly subject you to the Medicare surcharge, depending on your modified adjusted gross income, or MAGI.

In such a scenario, Berger recommends foregoing the extension. Instead, she says, spread the withdrawals over both years by making your first payment by December 31 of the year you turn 70½.

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, which is based on your age (and can be obtained from 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 required 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, that of recharacterizing a Roth IRA to a traditional IRA to avoid the tax burden resulting from the funds in 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 all accounts you have of each type and take a single distribution from one of the accounts. You can't, however, exercise such consolidation when it comes to 401(k)s, and only distributions from certain inherited IRAs can be combined.

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

To clarify, then, if you have multiple traditional IRAs or 403(b)s, you can add up all required RMDs within each type. You're then free to withdraw that total from only one account of each type, IRA or 403(b). You're not permitted, though, to withdraw any RMD amount for an IRA from a 403(b), or vice-versa.

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 can't combine RMDs from IRAs you inherited from several decedents.

It's also disallowed to make the distributions from inherited IRAs from traditional IRAs that you own. To illustrate this prohibition, 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, the RMD amount for which 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.

If you hold multiple employer 401(k) plans, their respective RMDs cannot be removed from any 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.

Note, too, that there are different rules for distributions for Roth IRAs that are inherited. 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.

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 making 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.

In the eyes of the IRS, you've missed making your RMD; the agency will then 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 than she needed to. 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.