Don’t forget the RMDs – a yearend mistake that can cost retirees big bucks

Ed Slott

Ed Slott is one of the nation’s top experts on IRAs. But a couple of years ago, someone near and dear to him neglected to take a required minimum distribution from one of her individual retirement accounts.

“It happened to my mother,” Slott admitted with a laugh – an ironic story for someone who has written numerous books on retirement distribution planning, and who also hosts a popular financial advice series on public television and trains financial advisers on IRAs.

“Her adviser just forgot about one of her accounts,” said Slott. “That shows you how easy it can be for this to fall through the cracks.”

Internal Revenue Service rules require retirement investors to begin withdrawing a certain amount annually from traditional IRAs (not Roths) and 401(k) accounts in the year that they reach age 70-1/2. The deadline for most required minimum distributions (RMDs) is Dec. 31, so this is a good time to double-check on your retirement accounts, or those of any family members you might be assisting with money management. Missing the RMD deadline leaves you on the hook for an onerous 50 percent tax penalty – plus interest – on the amounts you failed to draw on time (although there are ways to get that waived).

The RMD rules exist to limit the tax benefits of these accounts to the years when you save for retirement; income taxes on withdrawn assets are due in the year of your drawdown.

But RMDs can be a real headache. They can trigger an increase in income taxes if they push you into a higher bracket – and they can trigger higher taxes on Social Security benefits and substantial high-income surcharges on Medicare premiums.

All IRAs and 401(k) account owners who have reached the magic age are subject to the RMD rules. One exception: if you are still working for the company that sponsors your 401(k), the IRS rules do not require that you take a distribution.

There is also an exception to the Dec. 31 deadline. In the year that you turn 70-1/2, you have until April 1 to take your RMD. However, waiting until April means you will be taking two distributions in the following year.

If you inherit an IRA, distributions are required unless you received it from a spouse. The IRS rules on managing your inherited IRA can be found here.

RMDs must be calculated for each account you own by dividing the prior Dec. 31 balance with a life expectancy factor that you can find in IRS Publication 590. Often, your account provider will calculate RMDs for you – but the final responsibility is yours. The Financial Industry Regulatory Authority, the financial services self-regulatory agency, offers a calculator to help figure out RMDs

Learn more in my Reuters column this week; also see my RMD guide here at RetirementRevised.com.

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