Few people like required minimum distributions (RMDs), the withdrawals everyone age 73 or older must make at the end of every year from the IRAs and 401(k)s (except Roths) that they own. The distributions are mandatory, taxable and subject to a constantly changing web of rules.

Experts, however, offer a few tips to help you and your clients avoid undue RMD pitfalls.

For many people, perhaps especially those over 73, it can be harder to keep track of every IRA and 401(k) they’ve had over the many decades of their working life than it is to find their house keys. That’s why many advisors recommend consolidating retirement accounts.

“I personally favor the strategy of consolidation,” said Elaine King Fuentes, founder of Family and Money Matters in Miami. “As we get older, the simplicity of having everything in one place” is a definite advantage.

Funds in retirement accounts can be transferred to other, similar retirement accounts without incurring taxes or penalties, but the changeover must follow strict IRS guidelines, advisors warn. The money has to be moved directly, from brokerage institution to brokerage institution, without selling the assets in between. No distributions can be made to the account holder during the transfer period, and all funds must be moved at their market value on the transfer date.

Moreover, the transfer must be between like accounts—for example, from traditional IRA to traditional IRA.

“It definitely simplifies managing the RMD process,” said Megan Slatter of Crewe Advisors in Salt Lake City. “It’s easier to track and manage investments. Plus, having fewer accounts may mean less fees and can reduce paperwork. It makes calculating the RMD amount pretty straightforward.”

But there are disadvantages, she added. Consolidating retirement accounts could reduce the diversification of your portfolio, she said. And the transfer has to be handled carefully, she emphasized. “You want to make sure that whenever consolidating retirement accounts, they’re done correctly. Otherwise you might be triggering a tax event,” she said.

Other advisors point out that it’s important to distinguish between a rollover and a transfer. Transfers involve moving money from one IRA, say, to another at a different institution, said Jere Doyle, an estate planning strategist at BNY Wealth in Boston. Rollovers, however, shift funds between different types of retirement accounts, as from a 401(k) to an IRA.

Moreover, he said, rollovers are “limited to one tax-free rollover in a 12 month period.” That’s not true of transfers.

He further noted that consolidating retirement accounts does not affect the amount of the RMD. The total due is calculated from the aggregate value of all retirement accounts owned and the account holder’s current age. In fact, all IRAs that one client owns can be added together to calculate the RMD due “and taken from any IRA the participant wants,” he said.

Skipped RMDs
Still, some people do accidentally forget to take their RMDs. IRA providers are required to send account holders a statement every year, called Form 5498, which lists the account’s current market value, said Doyle. In many cases, though, 401(k)s can be trickier. Sometimes when an employee leaves an employer, the 401(k) requires that funds be moved, he said. “Many people will then roll the 401(k) into an IRA,” he said, which enables them to receive a Form 5498.

In addition, the SECURE Act 2.0 required the Department of Labor to create a searchable database to help people find lost or forgotten retirement accounts, he said. But it’s not up and running yet.

Nevertheless, when RMDs are skipped, the oversight must be rectified as soon as possible, experts say. That means making the delinquent withdrawals and, in most cases, paying an additional 25% penalty, called an excise tax. (It was reduced from 50% by SECURE 2.0).

Advisors, however, say there are ways to reduce or even waive the penalty. “You don’t want to knowingly skip an RMD,” stressed Michael Bryan, director of tax services at Cerity Partners in Louisville, Ky. “But if you inadvertently miss an RMD, there is the ability to request a waiver of the penalty or a reduction.”

You need to file Form 5329 with your tax returns, if not sooner, for every year missed, he said, and attach a letter to “show reasonable cause for missing the RMD.” Each excuse is weighed on a case-by-case basis, he said.

According to the IRS website, if the error is “corrected within two years" and meets the conditions of section 4974(e) of the Internal Revenue Code for, say, accidental or medically justified oversights, the penalty may be cut from 25% to 10%. The IRS site goes on to say that the penalty can even be waived entirely if the “shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall.”

SECURE 2.0 contained other good news for delinquent RMD payers, advisors say. It implemented a three-year statute of limitations on penalties. Now, penalties can only be assessed on the past three years of missed RMDs.

But J. Christopher Boyd at Wealth Enhancement Group in Cape Cod, Mass., cautioned that the statute of limitations is not retroactive to before SECURE 2.0 passed in 2022. So if a client has skipped RMDs for the past decade, say, the penalties for any RMDs missed before 2022 are still due (unless waived after filing Form 5329s for each missed year.)

Other Suggestions
Clients can forestall RMDs on 401(k)s if they keep working after turning 73, advisors say, though this won’t make any difference for RMDs due on IRAs.

A more practical suggestion is for clients to minimize their RMD obligations by simply reducing the balances in their IRAs and 401(k)s before they reach 73 and RMDs go into effect. One way is to convert some or all of their retirement accounts to Roths, said Kelly LaVigne at Allianz Life Insurance of North America in Minneapolis. “That involves paying taxes now [on the money that’s moved into a Roth account], but after the conversion that money will grow tax free [and be exempt from RMDs forever],” he explained.

Another idea is for those age 70½ or older who are “charitably inclined,” he said, to consider making qualified charitable distributions (QCDs) from their retirement accounts. These distributions allow clients to transfer up to $105,000 from a retirement account directly to 501(c)(3) charities, he sad, and unlike RMDs, the donations aren’t subject to income tax.

If you feel all this sounds daunting, you’re not alone. “The 2024 final RMD regulations have introduced considerably more complexity and confusion,” said Roman Kozak at RBC Wealth Management in Minneapolis. “The more complex and confusing the RMD regulations become, the more important it is for advisors to familiarize themselves to the best of their abilities with the new regulations and the impact they have on wealth planning and tax planning.”

Advisors, he added, should note that the minimum age for RMDs is scheduled to increase to 75 in 2033.