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By Patrick Fleming and Scott Bishop
People spend years accumulating wealth in IRAs and Retirement Plans (like 401k’s). Since the US Government allows for years of tax deductions and deferrals, they want their “pound of flesh” in your retirement but no later than age 70 ½ (go figure why the government chose a date other than just saying the year you turned 70). These required withdrawals are called Required Minimum Distributions or more commonly called “RMDs”.
For many people that are used to saving/accumulating, the concept of being forced to take an annual minimum distribution out of your retirement accounts is a big change and it is confusing. There are complex rules that are used to calculate the amount and determine the timing of your first distribution…and there are LARGE PENALTIES (that are 50% of the amount of the missed RMD) for doing it incorrectly.
With that in mind, as many of our clients are reaching (or closing in) on age 70, we wanted to list a few of our most Frequently Asked Questions (FAQs) – Hopefully this summary will help answer some basic questions, but if not, feel free to send us any further questions.:
First off, the IRS will know which IRA owners will be required to take RMDs. Since 2003, IRA custodians have been required to notify account owners if they have a required distribution to take and also help calculate the amount at the owner’s request. In 2004, the IRS helped account holders further by requiring custodians to report to them on clients who have required distributions. This is done by IRS Form 5498 and is only for informational reporting but is how the IRS gets their information.
If your 70th Birthday is between January 1st and June 30th, you must start this year (as you will be 70 ½ this same year.
If your 70th Birthday is between July 1st and December 31st, then you will be 70 ½ the following year.
Now that I know when to take my RMD, how much do I take (how is it calculated)?
This is simple in concept but deserves a discussion with a professional or at a minimum, with your IRA Custodian. Generally for IRA’s, you would take the year-end balance from the prior year for each IRA, add them up to a single total, and divide by a factor in the table the IRS provides called the “Uniform Lifetime Table” to determine your required distribution. This amount can be taken from one or multiple IRA’s as you see fit. However, IRAs of differing types need to be grouped together, so see your tax professional or advisor on distribution strategies.
Note: Employer-based retirement plans like 401(k) and 403(b) plans use a different set of rules and can be adjusted depending on whether you still work with the company where you have your plan. Also note that there can be exceptions to the rule (5%+ owner, multiple retirement plans, etc.) so it is important to consult with a professional when you have multiple types of retirement vehicles.
IT IS NOT TOO LATE!!! On your FIRST Required Distribution, it can be taken up to April 1st of the following year. After that, all RMD’s must be taken out during the calendar year in which they should be distributed. For example, if you missed your first distribution in 2014, you would need to take one by April 1st of 2015(for 2014) and another by year-end for 2015 (two in the same year). However, this may cause a higher income in 2015 and trigger higher taxes so it isn’t optimal…but is better than a 50% tax and interest/penalties for a missed RMD.
This is never a good situation and requires immediate action from the IRA holder – do not ignore it and assume that the IRS won’t catch it or that it falls under a statute of limitations (it does NOT). The RMD needs to be taken and IRS form 5329 should be filed to report to the IRS the missed distribution and calculate any penalty amount. This penalty can be waived by the IRS for good cause but again, it is a stiff penalty…..50% of the Distribution. It is important to understand that missed RMD’s have NO STATUTE OF LIMITATIONS if a Form 5329 is not filed. This is not something that will go away if the IRS “overlooks” your error for some time.
Now, the IRS has the ability to waive the penalty and in years past have done so for a good number of guilty parties with the appropriate reported written explanations/excuses. But with better reporting requirements, it is harder to claim that someone was unaware. RMD ignorance is NOT an excuse.
As always, feel free to send us questions on the topic or call the office to set up a time to talk. RMD’s don’t need to be a stressful concept if you are aware of what goes into them and the rules you should follow.
The information herein has been obtained from sources believed to be reliable, but we do not guarantee its accuracy or completeness. Moreover, you should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized investment advice from STA Wealth Management, LLC. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. STA Wealth Management, LLC is neither a law firm nor a certified public accounting firm and no portion of this article should be construed as legal, tax or accounting advice. We encourage you to visit IRS.GOV for the most current rules and regulations.
ALL INFORMATION PROVIDED HEREIN IS FOR EDCUATIONAL PURPOSES ONLY – USE ONLY AT YOUR OWN RISK AND PERIL.
IRS CIRCULAR 230 NOTICE: To the extent that this message or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
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