The theme this week on the One Minute Retirement Tip is What You Need To Know Before Starting IRA Withdrawals. I’m answering the most common questions I get about IRA required minimum distributions. 

Today, I'm talking about the big mistake or actually mistakes that you're making with your IRA distributions. These are the mistakes and they're all kind of related but these are the mistakes that I see clients make over and over and over again. These mistakes usually center around taxes and withholding. 

One of the most common mistakes that I see among people has to do with their first IRA mandatory distribution. The rules allow the first distributionto be deferred to April of the following year, so rather than having to withdraw your first RMD by the end of the year that you turn 72, you don't actually have to take your first required minimum distribution until April of the following year. 

But if you wait until April of the 2nd year - the year that you turn 73 to take that first distribution - you'll actually end up taking 2 required minimum distributions in that second year. That means double the distribution, double the reported income, and double the taxes from your IRA in that year. 

This situation can lead to all kinds of unintended consequences and potentially putting you in a higher tax bracket. So generally I don't advise clients to wait take their required minimum distribution in that first year. 

The other related mistake that I often see with required minimum distributions is improper tax withholding. I can't give you tax advice, and the amount of withholding that you have is completely up to you. I see some clients who withhold nothing and that's perfectly appropriate and I have other clients who withhold up to 25%. That's usually the top end of what I see. 

Where I see people making mistakes is withholding the wrong amount. Either you're in a really low tax bracket and you withhold too much in taxes, or you're in a high tax bracket and you don't withhold enough on taxes.  That's really the big mistake I see - improper withholding.

I strongly urge you to talk with your tax adviser to make sure that you're withholding matches your individual tax situation and that you are withholding an appropriate amount. I also recommend that you revisit your withholding every at least two or three years, since your tax situation will change, your income & your life circumstances will change, and tax laws will change.

Don't set it and forget it. Make sure that you're reviewing your withholding and right now -in the midst of tax season - it's a great time to revisit that and determine if your withholding amount should be adjusted based on this year's estimated income.

That’s it for today. Thanks for listening. My name is Ashley Micciche and this is the One Minute Retirement Tip. 

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