William Penn Life, 2018 (53. évfolyam, 1-12. szám)
2018-02-01 / 2. szám
Moneywise with Bob Bisceglia, National Sales Director IRAs & RMDs When is it best to take your required minimum distribution? IF YOU OWN AN IRA and are over age 70 Vi, then you are familiar with the term "required minimum distribution," or "RMD," as it is commonly known. You are aware, then, that you need to take a required distribution from your IRA annually and that you must take it in a timely manner. But, that leaves a fairly wide window for taking the distribution. William Penn Association (and all other IRA custodians) will let you know your RMD amount for the current year by Jan. 31 each year. This amount is calculated using a pre-set formula and your total account value as of Dec. 31 of the previous year. So, once you know your RMD for the year, should you take the RMD now, early in the year? Or, should you wait to take it later in the year, knowing that the RMD must be withdrawn by Dec. 31? There really is no right or wrong answer to this question and, depending on your personal situation, either option can make sense. Here are a few factors to consider when making your decision. Reasons to take your RMD early in the year • You won't have to worry about the 50% penalty tax. RMDs generally must be taken by Dec. 31 for the year in which they are required in order to be considered "timely." There is one exception to this rule: for the first year in which you are subject to the RMD rules. In that case, the first distribution can be deferred until April 1st of the following year, but you will also be subject to the RMD for the current year, thereby creating a "double distribution" within that taxable year. For this reason, few people elect to defer the RMD in their first year of required distributions. Clients who miss this deadline subject themselves to a 50% penalty tax on the amount they were supposed to take but didn't. Although Dec. 31 might seem like a long way off, consider taking your RMD now to avoid any potential for error. It's not uncommon for a member to postpone taking their RMD until later in the year, only to forget, become ill or otherwise preoccupied, leading to the deadline being missed. You have enough to worry about in retirement, but taking your RMD early in the year to avoid the potential of the 50% penalty shouldn't be one of them. • You won't leave your beneficiaries with a tight withdrawal window. If a member that is subject to the RMD this year happens to pass away before taking the RMD, their beneficiaries are required to take what would have been the member's RMD. To avoid any potential for penalty, this distribution still has to take place before the end of the year. The longer the member waits to take that RMD, the more difficult it becomes to hit that deadline. If the insured member should pass away early in the year, there is probably more than enough time for their beneficiary to take any remaining RMD by year end. But, if the member passes away on Dec. 15, for example, it's highly unlikely that the distribution could be made in a timely manner to meet the deadline. In order for the beneficiary to set up an "inherited IRA," they must provide proof of the member's death and complete the proper paperwork. In best-case scenarios, the death certificate only takes days to receive, but in certain circumstances, this process can take much longer. Plus, inherited IRAs can be funded only via a trustee-to-trustee transfer from the decedent's account, which can take several weeks in some cases. Add all that together and it's easy to see why it may be next to impossible for a beneficiary to take a decedent's remaining RMD by the end of the year if the death occurs late in the year. Taking your RMD earlier in the year minimizes this issue. • The remainder of the account can be rolled over and/ or converted. RMDs are considered to be the first money distributed out of an IRA account each year. RMDs are also not eligible to be rolled over. Put those two rules together and you'll notice that, if you are subject to the RMD this year, you must take your RMD for the year before you make any rollover or conversion to a Roth IRA. Failure to take your RMD before completing a rollover can lead to serious tax issues. For instance, the rolled-over RMD often becomes an excess contribution, subjecting the member to a 6% tax penalty for each year it remains in the new account until corrected. Here's an example. Harry is age 72 and subject to RMDs. Harry's RMD this year is $10,000, and he would like to roll $100,000 over to another IRA that is paying more interest. Before taking his RMD, Harry rolls over $100,000 from his account to another IRA. He then takes his $10,000 RMD for the year from his remaining IRA by Dec. 31 and thinks he has satisfied his RMD requirements for the year. Harry files his taxes the following April like he always does, but his CPA notices an error. What error, you may ask? Well, remember the rule that the first money out of the IRA in any given year is deemed to be the RMD? Since the first $10,000 that was rolled over was technically his RMD amount, that RMD cannot be rolled over and becomes an excess contribution to his new IRA, and will be subject to a 6% penalty tax every year until corrected. So, in essence, Harry only rolled over $90,000 and has also taken an additional $10,000 from his IRA this year, none of which was Harry's original intent. 4 ° February 2018 ° WILLIAM PENN LIFE
