What are 5 common RMD mistakes to avoid?

Ralph
00:00:00

Have you ever wondered if you're making costly mistakes with those required minimum distributions? Well, today I'm going to share some stories about five devastating RMD mistakes that could cost you thousands in penalties.

Stay tuned to learn how one of my clients faced a $50,000 IRS penalty that could have been completely avoided.

Podcast Announcer
00:00:23

Welcome to the Ask Ralph podcast where listening to an experienced financial professional with over 30 years of experience can help you make sense of confusing questions, current headlines and industry trends about taxes, small business, financial decision making, investment strategies, and even the art of proper budgeting. Ask Ralph makes the complex simple by sharing his real world knowledge from a Christian perspective with all things financial.

Now here's your Host, Ralph Estep Jr.

Ralph
00:00:52

Thank you for joining me today. I'm glad you chose to spend some time with me today. So let's work together and master our finances from that Christian perspective. Now if you missed yesterday's show, I talked about practical steps to get top dollar when you're selling your car. And I shared seven proven strategies to help put thousands of dollars back in your pocket. So if you missed it, I'm going to encourage you to go check it out.

Now today's listener question is a heartfelt one. It comes from Barbara in Tennessee. We seem to be on a roll from Tennessee lately. But this is what Barbara wrote. She says, "Dear Ralph, I'm turning 72 next year and I'm absolutely terrified about making mistakes of my Required Minimum Distributions. My husband passed away last year, and he always handled our finances. Now I'm trying to figure this all out on my own. I got three different retirement accounts.

One from my teaching career, another from a part-time job that I had at our church, and the IRA I inherited from my husband. Every time I try to understand the RMD rules, I get overwhelmed with anxiety. Just last week, I was talking with my friend Susan at church, and she told me her brother-in-law got hit with a $20,000 penalty for making a mistake with his RMDs. I can't afford to make that kind of error.

This money needs to last me throughout my retirement and help me leave something for my grandchildren's education. I've been praying for guidance, and then I remembered your show. Can you help me understand what mistakes I need to avoid? I don't want to disappoint my late husband by mismanaging what we worked so hard to save."

Well, let me start by saying, I am very sorry about you losing your husband. It's really tough when we find ourselves relying on somebody, then all of a sudden, we've got all of that on our shoulders. Now you've got to handle it. And I understand that confusion and anxiety. Trust me, these RMD rules even somebody that does this every day get a little confusing. So many of us face this. Like I said, RMDs are not simple. But you're trying to make good retirement decisions.

And for that, I applaud you at the same time, you're trying to manage multiple accounts, and I understand you don't want to make a mistake. So don't worry. I'm here to help you navigate this today because I've seen these mistakes and I'm going to tell you today how you can avoid them. You know, normally I tell you our show thrives on questions, and it does, but today I want to ask you some questions. I've built a listener survey and I want your honest opinion about the show. It's only going to take you about five minutes and I promise, no more than that. And here's the best part. All of the people who respond to the survey are going to be entered into a $250 Amazon gift card drawing. You get to the survey by going to askralphpodcast.com/survey. And listen, your answers are going to shape the show.

Just like your questions do. Here's a catch. I need your survey completed by December the 10th, because we're going to draw that lucky winner on December the 11th. And I would love to hear your feedback and tell you about what's going on with the show. I want to hear what you have to say. Again, you do that at askralphpodcast.com/survey. That's askralphpodcast.com/survey.

Now Barbara, your concern reminds me of a great verse from the Bible and it comes from Proverbs chapter 15, verse 22, and it tells us this. "Plans fail for the lack of council, but with many advisers they succeed." And you know, the truth is Barbara, this verse relates perfectly to what we're talking about this. And the key to this. If you think about it, the real key to this is you don't want to handle this alone. And Barbara, so I commend you for taking this first step and we're going to get to it today. And I'm going to tell you what you can do to make this work and some tricks and tips to avoid some common pitfalls.

Now listen, I've done several shows on RMDs. I want to put links to those in the show notes. So I'm going to assume we all understand what an RMD is. Now so just for a second, I'm just going to say basically that's the required distribution you have to take from your retirement accounts when you reach a certain age. But today, I'm not going to talk about the specifics of that.

I want to share some common mistakes I've seen, cause I don't want you to make these same mistakes. So I put together what I call five stories right from my practice. These are things and I call them war stories for lack of a better term that I've seen clients face over this past 30 some years of doing this.

And I don't want you to fall into these traps. So the first one, I'm going to call the forgotten account story. So let me introduce John. Now John's a 75-year-old retired pastor. Worked for a long time. He served three different churches during his 50-year career. What an amazing thing. And here's the problem though.

He had accounts with each and every one of those churches. So when RMD time came and hit for him, he was 72 years old. He only focused on his largest account. That one had about $500,000 in it. Which is great. You know, he had that money set aside. He was ready to start taking those distributions, but the problem was he didn't realize his other accounts, even though they were much smaller,
he had to take RMDs from those as well. He had a hundred-thousand-dollar account from a church in Tennessee. And the problem is when he came to me after the fact, he said, I just didn't know that I had to take RMDs from those. Well, all of a sudden, the IRS came knocking. And let me tell you, they were ruthless. They assessed a 50% penalty on his missed distributions. Guess what that cost him.

That cost him $5,000 after, you heard me, right. $5,000 in penalties. And that was money that could have gone to his grandkids or could have use it for the church's next building fund. So you might be asking Ralph, what do we learn from this? Well, there's a simple solution to this. Here's a first key takeaway. It is absolutely imperative that you create a complete inventory of all your retirement accounts. That way, you know exactly what you have, and you know what the nuances of each are.

And another thing I'm going to say what I think you could consider doing is consolidating them into one manageable account. As I see my client population, especially my older clients, they really started to focus on trying to consolidate things, to make it easier, make it more manageable. So that's my first takeaway from this first story. And that's the forgotten account story.

Don't fall into that trap and get zinged with that penalty from the IRS. Well, let's look at the second one. This is the one I call the charity confusion catastrophe. So, let me tell you about Sarah. Now Sarah is this devoted church member. I mean, she was devoted. She was also devoted to the local food bank. And she decided, she said to me Ralph, she said,
and I talked to her after the fact what she said, I decided I want to support my food bank. And she said, I'm going to take $25,000 from my retirement account, my RMD and I'm going to give that right to the charity. That was her goal. She wanted to use her RMD. She had heard about these things called QCDs or Qualified Charitable Distributions.

Again, I'd done a show on those before. And so for Sarah, I'm sorry to say this. She had the right heart, but the problem was she failed in execution. So you might be asking Ralph, what was the error? Well, here's the problem. When she went to the broker, she asked her that distribution, she had it paid directly to her, not directly to the charity. And she seem, you know, her plan was, she said to me, Ralph, I was going to get the money from them.

And I was going to cut a check to the charity. And it seems like a minor error. But here's the problem. The IRS disqualified the entire transaction here because here's the problem. The IRS has rules, and you've got to follow them in detail. So you might ask Ralph what happened? Well, she ended up paying $6,250 in unnecessary taxes.

It was considered a distribution for her. It wasn't a direct QCD or qualified charitable distribution. Her intention was for it to go to charity. She had the right heart. But in the end, if you think about it, the effective result of this is the charity lost $6,250 because she would have given them the whole amount. But now she had to pay tax on it. And the sad part of the whole thing, a simple change in the check payee would have resolved the issue. So you might be saying Ralph, what's the key takeaway here? You're going to hear this from me.

If you listen to the show, I say this all the time. Get professional assistance. Let me say that again. You've got to get professional assistance because her intention, her heart was right. But the execution of this where it broke down, where it broke down. So again, that's my charity confusion catastrophe. And the key takeaway is get professional assistance. Let's move on to the next one. This is what I see all too common. And this is heartbreaking. And I call this one the inheritance incident. And trust me, it hurts me every time I hear it. I have a client named Michael. He lost his father. And his father had squirreled away $300,000 into an IRA.

So he passed away. Michael was going through the grief of losing his dad. He was overwhelmed. Like he said to me, Ralph, it's bad enough losing my father. I didn't realize there were different rules for inherited IRAs. And here's the problem that Michael ran into. His father had already reached that RMD age.

He was already taking those annual distributions. So the law says Michael had to keep taking those RMDs. But the problem is Michael didn't know that. He didn't do it. He didn't implement that. So he ended up missing two years of those distributions. All of a sudden, the IRS come knocking and they socked him with a $37,500 penalty for those two years. And think about that for a second.

That was money his father worked his whole life to save. He said to me, he said, Ralph, my dad wasn't a wealthy guy. I mean, everything he put away took blood, sweat, and tears and sacrifice. And now the IRS has taken $37,500 and penalties. And what's the key takeaway here? Well, Michael could have avoided this with proper guidance. Don't let this happen to you. Again, get professional help and make that investment in your future because you want to avoid this inheritance incident.

And unfortunately, I see this so many times because people just assume, oh, it's an IRA. I know how those work. They don't understand the inheritance part of it. And in this particular case, the client never mentioned to me that he had inherited this IRA from his dad. So let's move on to the next one. This is what I call the multiple account miscalculation.

Let me paint a little picture. I got this person named Linda. She's a retired schoolteacher. Now Linda had four separate IRA accounts. When you look at the conglomeration of a two, she had $800,000. She did a great job of putting money away. And she was one of these people didn't want to spend money. She was doing it on her own and she calculated separate RMDs for each. You know, she figured I had to take 20,000 from this one, 15,000 from the other and so on and so forth.

Well, what's the problem here? Well, she didn't know she could have aggregated her total. She could have taken just one distribution if she had aggregated all those things together, but she made a miscalculation. And in the end, her withdrawal was $12,000 less than it should have been according to the IRS rules. So what happened here? The IRS came knocking and they hit her with a 50% penalty. 50% of that $12,000 that she should have taken now is lost to this IRS penalty.

Yes. They charged her $6,000 for the penalty. Why is that? Because she didn't understand the aggregation rules. She thought they could do it all on her own. She got this IRS notice and then she has countless sleepless nights. She did have the stress of dealing with the IRS. And it all could have been avoided
if she had sat down and worked with a broker or a professional, somebody like me and really sat down and explained all the rules to her. So this is another one you want to avoid. That's that multiple account miscalculation. Well, let's look at the next one. This is what I call the deadline disaster.

My grandfather used to say this all the time. He said, procrastination will cost you. And my client learned that the hard way. My particular client we're talking about here, he waited until December 31st to take his first RMD. He knew he had to do it. He'd studied the, he did a Google search. He says, I got to do this RMD. And he was taking $45,000 from his multi-million dollar IRA.

And he thought he was all set. He called his broker, it's the last day of the year. And on the other hand, the line was voicemail. He learned the hard way, he found they were closed for the holiday. Well guess what? The IRS is hard and fast on their rules. He didn't make the deadline.

He didn't get that $45,000 distribution in the current year. And that procrastination cost him a penalty of $22,500. That's half of that 45,000. Yeah, that's 50% of the money that was his money. Now he still would have had to pay tax on it. But this is the tax plus, because let me tell you the rest of the story. And then he was forced to take two distributions in the next year to catch up. Well, what did that do? That forced him into a higher tax bracket.

So he paid not only the penalty, but also more in taxes because his marginal tax rate went up. And here's the sad part of the whole thing.

All of it could have been avoided. You might be saying Ralph, how could he have done that? Well, it's simple. He would've set up automatic withdrawals. He could've planned.
He could've planned. He could've planned. If you don't hear anything else I'm saying about this one, plan plan, plan. So you might ask Ralph, what's the key point you're making here? As it says in the Bible verse from earlier, plans fail for lack of counsel. Each of these terrible outcomes could have been avoided if you had just introduced proper planning and professional guidance. So don't let this happen to you. And I'm going to share some tips to avoid these costly mistakes in a few minutes. But first, let me ask you a question. Are you one of these people losing sleep wondering how you afford everything on your holiday list this year?


So many of us are dealing with this. Let me tell you. I got some other calls this week about this very thing. Are you tired of starting every new year, buried under a mountain of holiday debt? Do you want to create those magical Christmas memories without the financial stress that usually comes with them.

And listen, this is a stressful time for a lot of people from a financial standpoint, from an emotional standpoint. And I put together this guide to you. I'm going to tell you, I can help you discover peace of mind with my guide. It's called "Surviving the Holidays Without Going Broke". And in that guide, I'm going to show you a proven budget system that actually works. I'll share with you some smart shopping strategies to help you slash your costs. I'm going to show you ways to create magical memories without maxing out credit cards.

In fact, some of the things I'm going to talk about are absolutely free. I'm going to give you some tips for teaching kids gratitude in this gimme more world and hey, listen, we're in a gimme more world. And at the central part of this, I'm going to explain to you in my view, how to keep faith and family at the center of your celebration. And isn't that what we all really want. So don't let January's credit card bill steal your holiday joy.

Download your free guide now. You get it by going to askralphpodcast.com/christmas. And listen, make this your most meaningful and dare I say, affordable holiday season yet. Truth is, your stress-free holiday season starts here. So go and get that download. Go get that guidance at askralphpodcast.com/christmas. Getting back to our topic.


You know, these mistakes are truly horrible. Think about the money that these people lost with these penalties. So I wouldn't be doing my job. I didn't give you some ways to avoid these costly mistakes. So let's jump right into it. First thing you've got to do is create a complete retirement account inventory. Pull out all those statements and make a detailed list of every retirement account that you own. On that list, put the account numbers, put the name of the financial institutions. Put the balances on there. Then the next thing you got to do is know which accounts require RMDs and which don't. Some type of retirement accounts don't. I'm not going to get into that discussion right now. While I'm talking about these action steps, but you got to put those in there and document any inherited retirement accounts separately, because as we found, they've got special rules. And while you're doing that, maybe you want to sit down with somebody like a broker, somebody like me and consider consolidate in those multiple accounts to simplify your RMD calculations.

You don't, this doesn't have to be so complicated. So that's number one, create that complete retirement account inventory. Number two thing I'm going to tell you to do is set up automated distribution systems. Don't find yourself in that 1231 thing, called a broker and they're closed. Work with your financial institution to establish automatic RMD withdrawals. Whatever that looks like for you.

Schedule these early in the year. I recommend scheduling them. You don't have to take the money but scheduling it in March or April to avoid those year-end rushes cause truth is, listen. If you think you're the only one calling your broker at the end of the year, you're not. Everybody's rushing for that same thing. You can set it up well ahead of time and just set it and forget it.

And don't worry about it. And set up direct deposit to your checking account or automatic charitable distributions. If you're going to do those QCDs, make sure you set them up to go directly to the charity. And then you want to create a system to verify that the distributions actually occurred. That's the key, because you might make that plan, you might plan on doing it, but maybe somebody at the brokerage forgets to do what they're supposed to do or something gets missed.

So pay attention and make sure there's distributions actually occur. I would not recommend that you make them for the last day of the year. Make them earlier, maybe in November or even the beginning of December. If you're going to do a one-time annual withdraw that way you can verify, you can make sure it's done.

And if it's not done, then you can go and get it figured out. And at the same time, this is the time to remind you, keep detailed records of all those withdrawals for tax purposes. They're supposed to send you that 1099-R but I would keep track of that. So that's my second thing. Set up those automated distribution systems.

Number three. Build your professional support team. If you're listening to me, you hear what I'm saying, partner with a qualified financial advisor who understands these RMD rules. Don't, you know, rely on Google and on the internet to go give you these answers. Engage with somebody like me, a tax professional will help you optimize your distribution strategy.

It's not as simple as just saying, okay, Ralph, here's the rules. Here's what I got to do. There are ways to optimize that distribution strategy. Make an investment in yourself because remember what Proverbs 15:22 says, plans fail without proper counsel. Another thing you might want to consider while we're here is consider working with an estate planning attorney. Maybe you've got those inherited accounts.

You want to understand how best to deal with those. And listen. Do this. Regularly check in with your advisory team to help you prevent those costly mistakes. Here's another recommendation I have for you and that's create what I call a distribution calendar. Mark your first RMD deadline. Listen, April 1st of the year following when you turn 72 or 73, depends on your particular date and set up that annual reminder for those December 31st deadlines. And I said, don't wait until the end, but schedule those things, set them up, get them on your calendar. And then schedule quarterly reviews of the distribution progress. Include key dates for tax payments related to your distributions, because the truth is you may also need to make some estimated tax payments.

And if you worked with me, I would probably have told you to have your broker withdraw federal and or state taxes. And at the same time, that's a great time to plan those charitable giving deadlines if you're using those QCDs, those qualified charitable distributions. Another thing I'm going to highly recommend is implementing that consolidation strategy. You know, if you've got retirement accounts all over the place and they've all got different features, one of the things that you really should consider is putting those multiple IRAs into a single account.

It makes it so much easier to manage. But then you got to keep track of those different types of accounts, because maybe you got traditional IRAs, you got 401ks, you got Roths. Each of those has to be kept separate because they're separate tracking, also for those inherited accounts. And then what I'm going to tell you to do is document all those consolidation transactions for tax purposes. Because as you make those consolidations, you'll be coming to see somebody like me to get their taxes done, I'm going to ask you those questions.

You should have documents for each of these. And let me give you one bonus action step. And this is something you can do right when you're doing all these distributions and planning. And that's what I call the investment strategy review. Evaluate your investment mix to ensure it supports your RMD strategy. This is a time to have that discussion with your broker and look at what the market's doing.

Look where your money is. You know, maybe you want to consider keeping a portion in liquid investments for easy distributions. Look at some tax efficient investment options for your remaining balance and plan for that long-term growth while maintaining necessary liquidity. And this isn't one of those things you just set it and forget it. That's why I'm going to highly encourage you to have those meetings. I don't know how many clients I have that are working in that field of brokerage. And they say to me, Ralph, he says, I love it. I'm here for my clients, but I couldn't help them. They only come to me when they have an issue, or they've got something they have to do.

And trust me. People want to talk to people. And listen, remember these steps aren't just about avoiding penalties. That's a huge thing. If you look at the things I talked about, how much people lost. But they're about being a good steward of their resources God has blessed you with. Just like your question.

You want to be a good steward about that. And if you implement these actions, you're protecting your retirement savings. And as you talked about, your insurance, you can contribute to support your family and contribute to your church and your community just like the lady wants to keep supporting the food bank. Let me be clear.

Taking action now can save you thousands of dollars in penalties and countless hours of stress later. Nobody wants those IRS notices. Nobody wants that IRS knock at the door saying, Hey, you owe us money. So listen to me. Don't wait till it's too late. Start with just one of these steps today and build from there. Now tomorrow, I'm going to discuss a timely topic. And that's how to survive the holidays without going broke.

Yeah. I told you I got a guide that you can download but I actually did an episode. I had a great talk with Mark Lawley. He's from the Practical Prepping Podcast and I want to share with you, you don't want to miss this practical tip for keeping your holiday spending in check while maintaining the joy of the season. Mark and I really had a great discussion. And that's what I'm going to share on tomorrow's show. Remember this. My passion is to help you achieve financial success. That's what I want to do. I want to see you live out your dreams. I want to see you grow in your faith. And I know together we can master your finances from that Christian perspective. So as you go about your day today, I'm going to remind you to stay financially savvy and may God bless you abundantly.

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