Column: To the year-end checklist, add mandatory
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[November 30, 2017]
By Mark Miller
CHICAGO (Reuters) - Nothing good lasts
forever, and so it is with tax-deferred retirement saving - that is, the
Contributions to traditional IRAs and 401(k) accounts are not taxed
upfront, but the U.S. government gets its due down the road. When you
reach age 70-1/2, a certain amount of your tax-deferred savings in IRAs
and most 401(k) accounts must be drawn down every year under the
Required Minimum Distribution (RMD) rules. And younger people need may
need to take RMDs on inherited IRAs.
Missing an RMD leaves you on the hook for an onerous 50 percent tax
penalty, plus interest, on the amounts you failed to draw on time. But
RMDs are easy to forget. Almost half (49 percent) of Fidelity Investment
account holders who need to take an RMD had not yet withdrawn anything
for 2017 as of early November.
That points toward a last-minute rush, said Maura Cassidy, the company’s
vice president of retirement. “It’s a little bit like the last-minute
rush to meet the tax deadline in April ... But you want to make sure you
do this properly, and it gets more difficult as the holidays approach.”
Cassidy notes that the stock market is closed on some days around the
holidays, which can slow the time required to settle trades on holdings
that might be needed for an RMD. The RMD deadline is Dec. 31, but that
falls on a weekend this year, which means any trades you need to
generate cash for an RMD must be done before the markets close on Dec.
The one exception: if you turned 70-1/2 years old this year, you have
until April 1, 2018, to take your 2017 distribution. However, doing that
means you will be taking two distributions in the following year – which
could have a significant impact on your income taxes.
The amount of RMD you owe is determined by your age, account balance and
life expectancy. Fidelity, Vanguard and other large investment firms
offer automatic RMD services that will automatically calculate the
amounts and make distributions. And Fidelity launched a family of mutual
funds earlier this year (Fidelity Simplicity RMD Funds) that combines
target date fund allocations with RMD automation.
Although RMDs are calculated for each IRA you own, you do not need to
take a separate distribution from every account. You could total up your
RMDs and take it all from one IRA – one that is a poor performer,
perhaps, or one that will help you rebalance an account that might be
overweight in equities against your overall allocation plan.
But 401(k) distributions must be taken from each account where an RMD is
required. (If you participate in a 403(b) plan, RMDs must be calculated
separately for each account but can be aggregated and taken from any
403(b) account.) And no RMDs are required if you still work for the
company that sponsors the plan.
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Four thousand U.S. dollars are counted out by a banker counting
currency at a bank in Westminster, Colorado November 3, 2009.
REUTERS/Rick Wilking/File Photo
Another wrinkle: although RMDs are generally not required on Roth IRAs, they
must be taken from Roth 401(k) and other employer-sponsored plans, assuming you
no longer work for that employer. “The withdrawals are not taxed, but this is an
area where some people tend to get confused,” said Maria Bruno, senior
investment strategist for Vanguard Investment Strategy.
No matter your age, RMD rules are in play if you inherit an IRA. But the rules
vary for different types of beneficiaries. A spouse who inherits a traditional
or Roth IRA as a direct beneficiary can roll the inherited IRA into her own IRA,
taking RMDs on her own age timetable. “That is really beneficial if the
surviving spouse is much younger,” said Cassidy.
Any other inheritor of an IRA - typically a child - has two choices: continue to
hold the account as an inherited IRA, or liquidate it. If you hold onto it, RMDs
determined by your own life expectancy will be required. Liquidation will incur
income taxes that are due in the year you receive the funds.
Retirees below the RMD age should consider planning steps to reduce their future
potential impact. RMDs can push retirees into higher tax brackets; they also can
trigger higher taxation of Social Security benefits and the surcharge on
Medicare premiums paid by high-income taxpayers (http://go.cms.gov/2iHQlhO).
“People who have left the workforce with large tax-deferred accounts can do some
smart planning between age 65 and 70,” said Bruno. “Presumably you have moved to
a lower marginal tax bracket, so it may make sense to accelerate some of that
income, and the tax liability.”
That can be done either through accelerated IRA distributions to meet living
expense, or through partial Roth conversions. “You just want to be careful not
to bump yourself into a higher marginal bracket,” she said. “And if you are on
Medicare, you’ll want to avoid triggering the high-income premium surcharges.”
For retirees already required to take RMDs, options are few. But one appealing
choice is a qualified charitable distribution (QCD). If you transfer funds
directly from your IRA to a qualified charity, that amount can count toward your
RMD and be excluded from taxable income. (The annual limit on QCDs is $100,000.)
So even though nothing good lasts forever, at least you will be doing good by
(The writer is a Reuters columnist. The opinions expressed are his own.)
(Editing by Matthew Lewis)
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