Three Common RMD Traps — Avoidable (133)

(Short episode) One small assumption can turn a routine Required Minimum Distribution (RMD) into an IRS penalty, and it happens to smart retirees all the time. We walk through the real-world RMD mistakes we see most often, using simple examples that make the rules stick without the jargon overload.

The “married filing jointly” trap: Why you still cannot satisfy two spouses’ IRA RMDs from one person’s account, even if the household withdraws the right total. Then we get practical about aggregation rules, because not every retirement account plays by the same combining logic. Traditional IRA RMDs can be aggregated across multiple IRAs, but 401(k) RMDs generally cannot. We also explain the 403(b) exception, and why mixing up IRA, 401(k), and 403(b) rules can create an accidental shortfall on the account you never touched.

We cover the rollover mistake that surprises people consolidating an old 401(k) into an IRA after reaching RMD age. RMDs cannot be rolled over, and skipping that step can lead to an excess IRA contribution and an ongoing penalty until it is fixed. If you care about retirement tax planning, RMD rules, and avoiding unnecessary IRS penalties, this is a quick listen that can save real money.

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Thanks for Listening! 

Jonathan

Episode Transcript

SPEAKER_00 (00:01):
If you're at the age where RMDs are showing up in
your life, you already know thebasics.
The IRS requires you to startpulling money out of your
retirement accounts.
And if you don't, there's apenalty.
But here's what I've noticedafter walking hundreds of
clients through this.
The mistakes that actually costpeople money aren't about
missing the RMD deadline,they're about assumptions, the

(00:25):
kind anyone could make.
And I want to walk you throughthe three that I see most often
so you know exactly what towatch for.
Mistake number one is theindividual mistake.
Let's use, let's say Tom andJanet.
They're both 73.
They need to begin taking theirRMDs.
And like most married couples,they think of their finances as

(00:47):
one household, one budget, onetax return, one financial plan.
So when Tom sat down to handlethis year's RMDs, this is the
first year he needs to takethem, or they need to take them,
he had what seemed like aperfectly sensible idea.
His IRA balance is a lot biggerthan Janet.
So what he thought he would dois why not just pull enough out

(01:10):
of his account to cover bothrequirements?
It's the same household, sametax return, same dollar amount,
same RD amount, no matter howyou slice it.
Unfortunately, that's not howthe IRS sees it.
The I in IRA stands forindividual, and there's no such
thing as a joint IRA.

(01:31):
So Tom's account in thissituation is satisfied, however,
Janet's is not.
And so now she's the onecarrying a 25% penalty on her
shortfall, and it would bereduced down to 10% if it's
caught within two years.
But the real penalty on moneyshe never touched for a rule she

(01:52):
never knew existed.
So I bring this up first becauseit's one that I see quite often.
Married couples think that ifthey share everything for
decades, including theirfinances, it's natural to think
that the retirement accountswork the same way.
And they don't.
Your RMDs are separate.
So your retirement account, youneed to take an RMD for each of

(02:16):
your retirement accounts as aperson.
You know, each person has tosatisfy their own RMD.
The next is the aggregationmistake.
So every account is anindividual, that's rule number
one.
Now let's look at where it getsa little more complicated
because not every type ofaccount plays by the same
combining rules.

(02:38):
If you've got multiple IRAs,you're in luck.
You can calculate the RMD foreach one, but you're allowed to
take the total from just oneaccount.
Or you can spread it acrosshowever many you'd like.
So you're not forced to takeyour complete or your total RMD
from one account if you don'twant to.
You can.
You can bunch them into oneaccount.

(02:59):
You can also spread them outamongst multiple IRAs if you
have multiple.
401ks don't work that way.
If you've got two 401ks from twodifferent employers, or one 401k
and one IRA, each one needs itsown RMD.
So taken from its own account,and you can't combine them.
Even if they're identical plansor or or strategies, they have

(03:22):
to be separate distribution.
So 401ks have their own RMDdistribution requirement.
If we look further at 403Bs,those plans can get an
additional exception.
You can combine multiple 403Bswith each other, but not with an
IRA or 401.
So unfortunately, plenty ofpeople assume their 401ks and

(03:46):
403Bs work the way an IRA does.
Just pull it all from one place.
But if you do that and you don'tfully understand the RMD rules,
you end up with a shortfallpenalty on the account you never
took a distribution from.
Mistake number three, therollover mistake.
Let me introduce you to Frank.

(04:06):
Frank's 74 years old.
He has 650, 650,000 sitting inan old 401k from a job he left
years ago.
And he's thinking about rollingit into an IRA.
Consolidates, uh, simplifieslife.
He can still keep his plan anduh investments and let that

(04:26):
money continue growing andworking for him.
But Frank's already RMD age.
And so there's a rule thatcatches people off guard.
RMDs cannot be rolled over.
Not partially, not into yourRoth IRA, not at all.
So at 74, Frank's lifeexpectancy factor puts his RMD

(04:47):
this year at 25,490.
If Frank rolls his entire 401kbalance into his IRA without
first pulling that 25,490 out,the IRS doesn't see a clean
rollover.
It sees an excess IRAcontribution, and that comes

with its own penalty (05:07):
6% every year until it's fixed.
So unfortunately, there's not ashortcut around this one.
The RMD must come out first, andthen once that's done,
whatever's left is eligible tobe rolled over or consolidated.
So these three mistakes are allcompletely avoidable once you

(05:28):
know how to look for them.
And that's really the point ofthis channel, not to scare you,
just to help you make informeddecisions so that you're seeing
the full picture before it costsyou something.
I'm Jonathan Bedner, certifiedfinancial planner at Paradigm
Wealth Partners.
If you'd like a second set ofeyes on your RMD strategy, your
retirement plan, I'd be glad towalk through it with you.

(05:51):
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(06:12):
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(06:34):
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(06:54):
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