Avoiding the 'withdrawal
pains' of retirement accounts
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[December 14, 2016]
By Mark Miller
CHICAGO
(Reuters) - (The opinions expressed here are those of the author, a
columnist for Reuters.)
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, who is
based in Rockville Centre, New York. "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.
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years when you save for retirement; income taxes on withdrawn assets are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.
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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.
TRICKY RULES
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: (http://bit.ly/2hqH5wp)
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 (http://bit.ly/1xKMPWm).
Slott warns that the rules are especially tricky for people who have
multiple accounts. “People often ask which of their RMDs can be combined
and taken from one account - they often think it doesn’t matter where
the distribution comes from,” he said. “But they’re wrong.”
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![](../images/121416pics/busine29.jpg)
FILE PHOTO - Retirees play poker at a singles club in Sun City,
Arizona, January 4, 2013. REUTERS/Lucy Nicholson
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The
IRS rules require that RMDs must be calculated separately for all the accounts
you own. In some cases, RMD amounts can be added together and the distribution
taken as you like from one or more of the accounts. Any type of IRA accounts can
be aggregated, which means 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 in your allocation plan.
Multiple 403(b) accounts also can be aggregated, but you cannot satisfy an RMD
from an IRA with funds from a 403(b), or vice versa. And 401(k) RMDs cannot be
aggregated at all - if you have more than one 401(k) account from former or
current employers, those RMDs cannot be aggregated - you must take the RMD from
the accounts separately.
KEEP IT SIMPLE
Slott notes that simplicity is the retirement investor’s friend when it comes to
RMDs - consolidating IRAs reduces paperwork and complexity. Likewise,
consolidating 401(k) accounts during your career makes it easier to track
investments and RMDs - and even avoid them if you are still working at age
70-1/2.
The 50 percent penalty is a tough pill to swallow - but Slott says the IRS often
will waive the penalty if you make a mistake but can offer a “reasonable cause”
for the error. First, take corrective action immediately by taking the required
distribution. Then, file IRS Form 5329, explaining in one written sentence how
you screwed up. “You were confused by the rules, or you miscalculated, or your
financial adviser made an error,” he suggests.
"It’s easy to get it waived," he added. “That’s what happened in my mother’s
case.”
(Editing by Matthew Lewis)
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