You’ve retired and starting to enjoy the fruits of all your years of hard work…you deserve it. Regardless of the age you choose to retire, it is filled with hope, mystery, and satisfaction. It is a time to celebrate and become active in other things besides work. Income is also a very important part of making retirement what you had hoped it would be…whether it is active or passive. But there are some things to look out for along the way.
Everyone knows about Social Security and the need to get that started at some point along the way during your retirement years. But what about your own investments, such as your IRAs for example? Where do they fit into the mix of income and options for you in the future? Unlike other investments, there are some restrictions that are critically important to be aware of, such as an RMD (Required Minimum Distribution).
The good news is, you’ve been able to grow your IRA over the years, and now it’s time for retirement. The not-so-great news: withdrawals from your traditional IRA are treated like taxable income, and you have to make Required Minimum Distributions (RMDs) every year, starting at age 70½, whether you need or want to or not, says Kiplinger in “When Do I Have to Take My First RMD?”
Perhaps the biggest aspect of an RMD is the timing…it must be started or you can end up paying excessive penalties. The penalties are expensive, up to half of your RMD if you miss the deadline. This is excessive for the simple reason that the government wants you to get your money out of the system.
The good news is that it is pretty easy to figure out your RMD today, unlike in the past where it was fairly complicated to understand and figure out. Today, there are online calculators that can help guide you through this calculation. However, I definitely suggest you meet with your estate planning attorney and go through the process and the calculation just to make sure you have it right for the amount and the timing.
Believe it or not, the IRS gives you a little wiggle room for that first RMD…until April 1st of the year that you reach age 70½. However, it doesn’t change the date of the second RMD, which is due on December 31st of that same year. Therefore, you could end up taking two RMDs in one tax year if you delay it to the April 1st date. This could have some significant impact on your tax bill since it will be double that year. It’s important to plan for this if you are going to extend the date of the first distribution.
There are a few factors to be aware of that could change your RMD. One of these relates to the age of your spouse. If your spouse is more than 10 years younger than you are and is named as the sole beneficiary on at least one of your IRAs, the RMD could be less than what some online calculators show. The calculators are pretty accurate, but I advise you check the numbers with your estate planning attorney just to make sure you aren’t missing something and have to pay the penalties.
If somewhere along the way you discover that you missed your RMD, get the error fixed immediately. Calculate out how much you should have taken and remove that amount as soon as possible from the IRA. You would file Tax Form 5329, “Additional Taxes on Qualified Plans (Including IRAs) and Other Tax Favored Accounts.” You can file this with your tax return or by itself. And if you are requesting that the 50% penalty be waived, payment does not have to be made when the forms are filed. To close it off, make sure you attach a letter explaining what happened to cause the delay and the steps you’re taking to fix the error.
One exception that is often missed is when you are still working for the employer where you have your 401(k). If you’re still working for this company, you can delay taking RMDs from your current employer’s 401(k) until after you stop working, unless you own 5% or more of the company. It is important to note this only applies to your current employer and the 401(k) you hold with that employer. You’ll have to take RMDs from prior employers, even if you’re still working. However, you might be able to delay your RMD if your current employer allows you to roll your money over from other retirement accounts into the current employer’s plan.
As you can see, there are some nuances to this RMD game you have to play when you hit 701/2. It is really important to understand how they might impact you given your current situation. This is why I highly advise everyone to sit down with their estate planning attorney before this age and have a plan in place to avoid any extraneous penalties. It’s a very expensive mistake if you don’t have everything laid out the way the IRS wants.