The biggest RMD mistake isn't what most people think — and it can trigger IRS penalties or push you into a higher tax bracket. Here's how to avoid it.
The biggest RMD mistake is missing a Required Minimum Distribution altogether — or calculating it incorrectly — especially with inherited IRAs, where the rules are far more complex than with a standard retirement account. A close second is failing to understand how RMDs are taxed: they count as ordinary income, they typically grow larger every year, and they can push retirees into a higher tax bracket than they expect.
At Oak Road Wealth Management, a fee-only fiduciary financial planning firm based in Lee's Summit, Missouri and serving clients nationally, we see this mistake often — and it's usually avoidable with the right planning.
A Required Minimum Distribution (RMD) is the minimum amount the IRS requires you to withdraw each year from tax-deferred retirement accounts, such as a Traditional IRA, 401(k), or 403(b), once you reach the required age. RMDs also apply to beneficiaries who inherit these accounts.
The mistake isn't usually carelessness. It's complexity. Retirement accounts, inherited accounts, and tax brackets interact in ways that are easy to miscalculate — and the IRS does not forgive the error quietly.
If you miss an RMD or withdraw less than required, the IRS can charge an excise tax penalty on the amount not withdrawn. This penalty was reduced from 50% to 25% under the SECURE 2.0 Act, and it can drop to 10% if the mistake is corrected within a defined window. That's still a significant, unnecessary cost for an error that's usually preventable.
Inherited IRAs carry the highest risk of RMD mistakes because the calculation rules depend on who inherited the account, when, and their relationship to the original owner.
Since the SECURE Act changed the rules in 2019, many non-spouse beneficiaries must now empty an inherited IRA within 10 years of the original owner's death — and in many cases, they still owe annual RMDs during that window, not just a final withdrawal in year 10. Spouses, minor children, and disabled or chronically ill beneficiaries follow different rules entirely.
This layered complexity means two people who inherit similar accounts can owe very different amounts, on very different timelines. Getting it wrong isn't a matter of not paying attention — it's a matter of the rules simply not being intuitive.
RMDs are taxed as ordinary income in the year they're withdrawn, not as capital gains. This is the second major misunderstanding we see.
Because RMDs are calculated as a percentage of your account balance divided by a life expectancy factor, and because that balance often continues growing through market performance, the dollar amount of your RMD typically increases every year — even as the required percentage itself rises with age. Retirees are frequently surprised that a distribution they didn't ask for shows up as taxable income, sometimes large enough to push them into a higher marginal tax bracket, increase Medicare premiums (IRMAA), or make more of their Social Security benefits taxable.
Converting a portion of a Traditional IRA to a Roth IRA before RMDs begin moves that money out of the RMD calculation entirely going forward. You pay tax on the conversion now, at a bracket you can control, rather than being forced into whatever bracket a growing RMD pushes you into later.
For those who are charitably inclined, a Qualified Charitable Distribution allows you to send RMD funds directly from your IRA to a qualified charity. The amount counts toward satisfying your RMD but is excluded from your taxable income — a straightforward way to reduce the tax impact while supporting causes you care about.
Both strategies require careful timing and coordination with your broader tax picture, which is why they work best as part of a proactive plan rather than a last-minute decision in December.
The biggest RMD mistake is missing the distribution deadline or miscalculating the amount owed, which most commonly happens with inherited IRAs due to their complex, beneficiary-specific rules.
The IRS can assess an excise tax penalty on the amount you failed to withdraw — up to 25%, reduced to 10% if corrected within the applicable correction window.
No. RMDs are taxed as ordinary income in the year they're taken, just like any other withdrawal from a tax-deferred account. They aren't taxed at capital gains rates.
RMDs are recalculated each year based on your account balance and a life expectancy factor. As you age, the required percentage increases, and if your account balance grows, the dollar amount grows along with it.
Roth conversions before RMDs begin and Qualified Charitable Distributions (QCDs) once RMDs are required are two of the most effective strategies for managing the tax impact.
No. Inherited IRA rules depend on your relationship to the original owner and when they passed away, and often follow a different timeline — such as the 10-year rule introduced by the SECURE Act — rather than the standard RMD schedule.
Oak Road Wealth Management is a fee-only fiduciary financial planning firm based in Lee's Summit, Missouri, serving clients nationally. This article is for informational purposes only and does not constitute personalized tax, legal, or investment advice.
Written by Andrew Matz, Financial Planner at Oak Road Wealth Management.
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