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Year-end Tax Checkup If You Are Older Than 70.5 Years – Have You Satisfied Your 2014 Required Minimum Distribution?



Do Not Be At Risk for A Major Tax Penalty

Don’t let the hustle and bustle of the holiday season distract you into a hefty tax penalty come April. As the end of a year approaches, many consumers begin taking distributions from many of their retirement accounts-including 401(k) and 403(b) plans, and traditional IRAs-starting in the year they turn 70-and-a-half or the year when they retire, whichever is later. Failure to do so and the amount you should have withdrawn will be taxed at 50%. It’s one of the biggest penalties in the tax code and you would be surprised how many people fall into this trap. Fidelity Investments reports that of the more than 750,000 Fidelity IRA customers who need to take a Required Minimum Distribution (“RMD”) this year, 68% have yet to withdraw enough.

For many people the wait to the end of the year to take the RMD is deliberate because waiting to withdraw gives funds more time to grow tax-free especially when the market is on an upswing, as it has been.

Just don’t delay too long and put this off beyond mid-December because it can take a few days for trades to settle and funds to become available for withdrawal especially when markets are closed for holidays and with people off celebrating the holidays the processing time may take longer. You also want to make sure you get with your advisor before her or she takes off for the balance of the month to be certain of the amount of RMD that must be taken.

Brokerages often have resources consumers can tap to make sure they’re withdrawing the right amount, or even to set up automatic withdrawals. The IRS also has worksheets and charts to help determine the correct amount. Even if you think you have that number nailed down, it can help to have a conference call with your tax preparer and financial advisor to plan for how a withdrawal may affect your tax bill next year. Consider taking out more than the minimum to ensure you have enough to live on-or just the minimum to avoid being pushed into a higher tax bracket.

Other Pitfalls To Watch Out For

Unnecessary RMD’s. Even if you have multiple individual retirement accounts, you only need to take one RMD from the collection, based on your age and the total value of the accounts. You don’t have to take it out of each individual account.

Merged-money mistakes. If both spouses need to take RMD’s, that cash needs to come from both parties’ accounts. Filing a joint return doesn’t mean you could take the entire amount for both spouses from one spouse’s account. The “I” in IRA is for individual. There’s no such thing as a “joint IRA”.

Inheriting An IRA. If you inherit an IRA, check before year’s end to see if you need to take an RMD. Death gets you out of pretty much everything in the tax code except for required minimum distributions.

Facing the RMD for the first time. You have a bit of a grace period. In the year you turn 70.5, you have until April 1 of the following year to take that first distribution. But a distribution on say, March 15, 2015, counts for 2014. You’ll still need an RMD for 2015-and that double withdrawal could have a more significant tax impact.

And if you do forget, what should you do?

With a properly completed Form 5329, Additional Taxes On Qualified Plans, attached to your return you may be able to persuade the IRS to waive the penalty. For taxpayers having to follow this procedure we also recommend including a statement explaining why you missed the deadline.

If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation.

Original Post By:  Jeffrey Kahn