Friday, December 20, 2013

A Solution To The IRA Required Minimum Distribution Blues

Ashlea Ebeling for Forbes writes: Four out of ten people who are supposed to take withdrawals from their Individual Retirement Accounts for 2013 had yet to do so as of Dec. 6, putting them in danger of facing a tax penalty, according to Fidelity Investments. If you fail to take a required minimum distribution (RMD) from an IRA, you risk owing a penalty calculated as 50% of the amount you should have taken out but failed to. So it’s good news that there’s a handy solution to prevent this: putting your IRA distributions on auto-pilot.

Fidelity has been promoting the idea of enrolling in automatic withdrawals to its clients, and for tax year 2013 almost half (47%) of its 500,000 Individual Retirement Account owners who are required to take money out were signed up, a 167% increase over tax year 2012. Still 42% hadn’t taken any money out as of Dec. 6, suggesting a lot of taxpayers are dawdling—or possibly making a big tax mistake.

A quick recap of the basic rules: IRA owners must normally begin taking annual RMDs after they turn 70 and a half from their own traditional IRAs or IRAs inherited from a spouse, although not from their Roth accounts. Non-spousal IRA heirs of any age must take RMDs from both traditional and Roth accounts. The amount you must take out is calculated based on your life expectancy and the balance in your IRAs the end of the prior year.

There are special rules: for folks who turn 70 and a half, they typically have until April 1 of the following year to take their first distribution. Another trap: there is an RMD required in the year of death, if the deceased is over 70 and a half.

Some IRA owners might be waiting until year-end simply to get every last day out of the tax-deferred (or tax-free if it’s a Roth) compounding that’s the appeal of these accounts.

Another tax-wise year-end IRA strategy if you’re 70 and a half or older is to give gifts to charities directly from your IRA; these gifts count toward your RMD. The law that allows this, the IRA-Charitable Rollover law, expires on Dec. 31, 2013 (it’s one of the tax extenders Congress is leaving in limbo). It lets you direct the custodian of your pretax IRA to transfer up to $100,000 per year to a public charity without having to count that distribution in your income. In return, you’ll forego the charitable income tax deduction. Still this strategy can leave you ahead whether or not you normally itemize deductions or not. But act fast—the charity must cash the check by Dec. 31 for the distribution to count towards your 2013 RMD.

A couple of other IRA-RMD-related items on the legislative front to watch out for: President Barrack Obama has proposed eliminating RMDs for IRAs worth $75,000 or less, and making non-spouse beneficiaries of inherited IRAs deplete the accounts within five years of inheriting them.

Fidelity has answers to commonly asked RMD questions, including the mechanics of giving your RMD to charity, here.


Post a Comment