Not taking required minimum distributions on time will cost you.
You worked hard for years.
You also took advantage of your employer 401(k) and utilized your own traditional IRAs to plan for retirement.
But your work is not over.
You still need to protect your IRA and 401(k).
As the recent Kiplinger article titled “FAQs About Required Minimum Distributions for Retirement Accounts,” points out, you must take required minimum distributions (RMDs) if you are 70 ½ or older.
To avoid an IRS penalty these must be taken by December 31.
If it is your first year, you have a grace period until April 1 of the following year.
What happens if you fail to do this?
You will be hit with a 50 percent tax penalty for the amount you failed to take out.
Your read correctly.
The penalty is half of your RMD for the year.
How can you protect your money from the penalty?
Thankfully, the article also provides some useful advice.
Do not delay.
Start working with your financial service advisors early.
The end of the year is one of their busiest times.
Give them plenty of notice, especially if it involves selling holdings.
Markets are closed on holidays.
Give to charity.
You can give up to $100,000 from your RMD directly to charity.
There is no time frame for this qualified charitable distribution, but you must do it right.
You can literally make the donation any time during the year as long as it is before December 31.
Get your financial advisors involved here, too.
Know your birthday.
Were you born between January and June?
If yes, then you will have your "half birthday" within the same calendar year.
Consequently, if the year is 2016, you will need to take your RMD by April 1, 2017.
On the other hand, if your birthday is between July and December, your half birthday will be in the following calendar year.
If the year is 2016, you will not need to take your first RMD until April 1, 2018.
Remember, if you wait until April to take your first distribution, you will still need to take the second distribution by December 31 of the same year.
Find out the RMD rules for 401(k)s.
401(k) RMDs are a little different.
Are you already retired?
If yes, then you will need to make the withdrawal according to the same rules as the traditional IRA.
If you are still working, you can usually wait until you retire to take your first RMD.
You cannot own more than 5 percent of the company.
Yes, these rules can get a little complicated.
By following this general advice and the specific advice of your financial advisors, you will be able to save your traditional IRA and 401(k) from unnecessary penalties.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.
Reference: Kiplinger’s (November 23, 2016) “FAQs About Required Minimum Distributions for Retirement Accounts”