Heed rules on required minimum distribution
By Laurie Samuels July 20, 2012 6:52PM
Updated: October 26, 2012 9:38PM
Uncle Sam allows you to defer, not avoid, taxes on qualified retirement accounts. This is truly worth repeating to oneself because it is a huge misunderstanding among retirees and one that comes with one of the highest IRS penalties.
Failure to take the required minimum distribution, commonly referred to as RMD, comes with a 50 percent penalty on the amount that you failed to take. Yes, that’s right, a 50 percent penalty! So if the IRS required you to pull $10,000 and you failed to do so by the required date, you owe the IRS a $5,000 penalty, and you still must take the $10,000 from your account and pay taxes on that $10,000 distribution.
So, when are RMDs applicable? First, they apply to “qualified” accounts, which mean the accounts have never been taxed — such as 401(k), 457, 401(a), 403(b), IRA and TSP accounts. Second, taxes are deferred on qualified retirement accounts until the year the account holder turns 701/2. However, the first RMD payment can be delayed until April 1 of the year following the year in which the account owner turns 701/2. Do be aware that if you delay the first distribution until that following year, you will be required to take two distributions — your age 701/2 distribution and your age 71 distribution. Since RMD calculations are based on your life expectancy and account balances they will change each year.
If you are in your 50s or 60s this is an ideal time to maximize your accounts for your retirement and your beneficiaries. There are significant benefits to planning for retirement and positioning accounts well before you actually retire. Retirement is no longer five to 10 years. Today, people are spending a third of their lives in retirement.
If you are in your 70s there are strategies for taking your required minimum distributions and leaving your accounts to loved ones. Although not the most common concern, some retirees feel that RMDs will deplete their accounts and they will consequently be unable to pass funds to loved ones. Do note that Uncle Sam has a separate required minimum distribution system in place for qualified accounts that are passed to beneficiaries.
Laurie Samuels is a retirement
and estate planning attorney in Illinois.
For information, contact Abednego Wealth Management at (888) 633-6119.