You’ve spent decades saving for retirement—but one small mistake could cost you thousands. Retirement accounts like IRAs and 401(k)s come with rules, deadlines, and tax implications that aren’t always obvious. And when those rules are broken, the penalties can be steep. This article highlights a common retirement account error that continues to catch retirees off guard—and how to avoid it before it’s too late.
Missing the Required Minimum Distribution (RMD) Deadline
Once you turn 73, the IRS requires you to start withdrawing a minimum amount from your traditional IRA or 401(k) each year. If you miss the deadline—even by a day—you could face a penalty of 25% of the amount you were supposed to withdraw. That’s not just a slap on the wrist—it’s a financial gut punch.
Many retirees don’t realize they need to take RMDs from each qualifying account. Others assume 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 IRAs can be aggregated for RMDs, but 401(k)s must be calculated and withdrawn separately.
The Tax Trap
RMDs are considered taxable income. If you forget to take one and then scramble to withdraw a large amount, you could bump yourself into a higher tax bracket. That means more taxes on your Social Security, investment income, and even Medicare premiums. Planning ahead helps you avoid this domino effect.
If you inherit an IRA, the rules are different—and often misunderstood. Non-spouse beneficiaries typically must withdraw the entire balance within 10 years. Failing to do so can trigger penalties and tax consequences. Many heirs don’t realize they’re subject to RMDs and end up with unexpected bills.
Confusing Roth vs. Traditional Rules
Roth IRAs don’t require RMDs during the original owner’s lifetime—but Roth 401(k)s do. This catches many retirees off guard. If you don’t roll over your Roth 401(k) into a Roth IRA before retirement, you could be forced to take unnecessary withdrawals. It’s a simple fix—but one that’s often missed.
Not Updating Beneficiaries
Outdated beneficiary designations can lead to legal complications and missed opportunities. If your spouse has passed or your children have changed names, your retirement account could be distributed in ways you didn’t intend. This doesn’t directly affect your payout—but it can create chaos for your heirs.
Forgetting About Old Accounts
Many retirees have multiple retirement accounts from previous jobs. If you forget about one, you might miss its RMD—and face penalties. Consolidating accounts or setting reminders can help you stay on top of your obligations.
Automated withdrawals are helpful—but they’re not foolproof. Changes in account value, tax law, or your age can affect your RMD amount. You need to review your strategy annually to ensure compliance. Blind trust in automation can lead to costly errors.
One Mistake Can Shrink Your Nest Egg
Retirement accounts are powerful tools—but they come with strings attached. Missing an RMD or misunderstanding the rules can lead to penalties, taxes, and reduced income. The good news? These errors are preventable. With a little planning, regular check-ins, and professional guidance, you can protect your savings and enjoy the retirement you’ve earned.
Have you run into retirement account confusion—or found a strategy that works? Share your experience in the comments.
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