For many retirees, having accumulated savings beyond Social Security benefits offers a crucial financial cushion in retirement. Withdrawals from tax-advantaged accounts such as IRAs and 401(k)s can help cover living expenses. However, not all retirees may need to draw from these accounts immediately if their Social Security benefits sufficiently cover their basic needs or if their overall living costs are low.
When retirement account funds remain untouched, they continue to grow tax-deferred, potentially enhancing the nest egg for future use. Furthermore, delaying withdrawals can reduce immediate tax liabilities by postponing income recognition. Yet, it is important to recognize the regulatory requirements governing mandatory withdrawals, namely required minimum distributions (RMDs), which typically begin at age 73.
RMDs represent the minimum amounts that retirees must withdraw from traditional retirement accounts annually once they reach the specified age threshold, unless their account is a Roth IRA or Roth 401(k), which are generally exempt. Failure to comply with RMD requirements can result in significant penalties.
This article highlights three pivotal mistakes to avoid with RMDs in 2026, aiming to help retirees navigate regulatory rules while minimizing tax burdens and penalties.
1. Missing the Annual Withdrawal Deadline
Upon reaching age 73, the Internal Revenue Service mandates that individuals commence taking withdrawals from their qualifying retirement accounts. While there is a provision allowing first-time RMDs to be deferred until April 1 of the year following one’s 73rd birthday, subsequent withdrawals must be completed by December 31 annually.
Failing to withdraw the required minimum amount by this deadline triggers a steep penalty equating to 25% of the RMD value not taken. Given the likelihood of distractions or busy year-end schedules, many retirees could inadvertently miss this crucial deadline.
To mitigate this risk, automating RMD withdrawals through one’s financial institution or advisor is a prudent measure. This automation helps ensure compliance by scheduling distributions ahead of the deadline, preventing both oversight and associated penalties.
2. The Consequences of Deferring the Initial RMD
A key exception allows retirees to delay their first RMD until April 1 of the year after they turn 73. While this postponement defers immediate taxation on retirement funds, it results in a catch-up scenario whereby two RMDs must be taken in the same year: the deferred RMD for the prior year and the current year’s RMD.
This double withdrawal can substantially increase taxable income in that year, potentially moving retirees into a higher tax bracket and generating a sizeable tax liability. Elevated taxable income might also trigger other financial consequences such as Medicare premium surcharges years later.
Individuals considering this deferral should carefully evaluate the resulting income spike and its possible repercussions on overall tax strategy and government benefit costs.
3. Misunderstanding Employment Status and RMD Obligations
Some retirees continue working beyond age 73 and may believe this exempts them from RMD requirements. While it is true that individuals still employed by their current employer do not need to take RMDs from that employer’s qualified retirement plan, this exemption is limited.
Specifically, it applies only to the current employer’s retirement plan and only if the individual owns 5% or less of the business. Crucially, RMD obligations from all other retirement accounts, including prior employers’ 401(k)s and IRAs, commence at age 73 regardless of employment status.
Failure to recognize this nuance can lead to overlooked distributions and subsequent penalties. Retirees must therefore review all retirement accounts comprehensively to ensure full compliance.
Ultimately, careful planning and awareness of the technicalities surrounding RMDs can prevent unnecessary financial penalties and optimize retirement income management. Automation of withdrawals, evaluating the timing of initial distributions, and understanding exceptions linked to work status are vital to managing these mandatory distributions effectively.
Retirees and advisors alike should remain vigilant to these rules and their implications to avoid costly errors and to maintain financial resilience throughout retirement.