Retirement savings through traditional individual retirement accounts (IRAs) and 401(k) plans offer the advantage of making contributions with pre-tax income, thereby reducing taxable income during one's working years.
However, these accounts come with specific withdrawal rules once the account holder reaches a specified age. The law mandates Required Minimum Distributions (RMDs), which are minimum amounts that must be withdrawn annually starting at age 73 for most individuals, or at age 75 if born in 1960 or later.
It is crucial for retirees and those approaching these age thresholds to understand and comply with these RMD rules to avoid costly penalties and adverse tax consequences. Below are four prevalent errors related to RMDs to be mindful of in 2026.
1. Neglecting the RMD Withdrawal Deadlines
The first required distribution from traditional retirement accounts becomes due by April 1 of the year following the year in which an individual turns either 73 or 75, depending on their birth year.
One critical misunderstanding is assuming that all subsequent RMDs can be deferred to that same April 1 deadline annually. After the initial RMD, all following withdrawals must be taken by December 31 of each year.
Failing to adhere to these deadlines results in a substantial penalty taxed at 25% of the amount that was supposed to be withdrawn but was not.
It is also important to consider that if a person delays their first RMD until April 1 of the year after turning the applicable age, they will be required to take two distributions in that year: one for the prior year and one for the current year.
This situation could significantly increase their taxable income for that year, potentially leading to a larger tax bill than if they had taken the initial RMD timely. Therefore, only those with compelling reasons should postpone this initial withdrawal.
2. Misconceptions Around Working Status and RMD Obligations
Individuals may mistakenly believe that continuing employment exempts them from taking RMDs. While there is a specific exception that allows those still working to delay RMDs from their current employer's 401(k) plan until retirement, this rule only applies under certain conditions.
To qualify for this deferral, the individual must not own more than 5% of the company sponsoring the retirement plan.
This exemption is limited to the retirement plan provided by the current employer and does not extend to any IRAs or 401(k) plans held from previous employers.
Therefore, retirees who are still employed must ensure they understand which accounts require distributions and which might be deferred.
3. Withdrawing RMDs Without a Thoughtful Tax Approach
RMDs generate taxable income, which may have significant effects on an individual's overall tax situation and related financial matters.
For example, increased income from RMDs can elevate Medicare premiums due to income-related monthly adjustment amounts (IRMAA).
Additionally, higher taxable income could result in a portion of Social Security benefits becoming taxable, which would not otherwise occur at lower income levels.
Given these complexities, it is advisable to collaborate with a financial advisor or tax professional to develop a withdrawal strategy that mitigates these risks.
One possible strategy includes qualified charitable distributions (QCDs), which allow direct transfers of RMDs to a charitable organization, thereby satisfying the RMD requirement without increasing taxable income.
4. Consuming RMD Funds Instead of Leveraging Investment Opportunities
Some retirees anticipate their RMDs as additional spending money and may use the distribution for non-investment expenses.
It is important to understand that while you cannot redeposit RMDs into tax-advantaged accounts, you are free to reinvest these funds within taxable accounts or other financial vehicles.
Options include funding brokerage accounts or establishing Certificates of Deposit (CDs) to continue growing these assets.
Thus, rather than spending funds unwisely simply because withdrawal was mandatory, retirees might consider reinvesting distributions to maintain or grow their wealth post-distribution.
Careless handling of RMDs can lead to costly taxes and lost growth opportunities. Awareness and adherence to timing, understanding exceptions, tax planning, and prudent reinvestments are key to optimizing retirement income management in 2026 and beyond.