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Jerry Citarella: It’s required minimum distribution season again

Financial Truth

Posted: October 25, 2011 1:55 a.m.
Updated: October 25, 2011 1:55 a.m.


'Tis the season to take money… even if you don’t want to.

The IRS has given us the gift of tax deferral, with limits. At a certain point it says enough is enough.

This is when you’re required to take what’s known as a required minimum distribution, or RMD, from many types of retirement accounts. Withdrawals are not an option, and you can be heavily penalized if you don’t abide by the rules.

The IRS giveth, and the IRS taketh away.

It’s actually not a bad deal, but it does come as a surprise to many. Rules clearly state the minimum amounts a retirement plan account owner must withdraw annually, starting with the year he or she reaches age 70 1/2 or, if later, the year in which he or she retires.

This must then continue each year until the account owner dies or the balance is exhausted. You don’t, however, have to withdraw proportionately from all of your plans, nor are you limited to how much you can take in total. This is where some people get confused.

I say this is RMD season because it’s when most companies holding individual retirement accounts and other types of retirement plans start sending RMD notices to their account holders. Some will tell you how much you’re supposed to take, while others will only tell you that it’s time.

Confusion can start when multiple retirement accounts are held. The rules require that you take out a specific amount from all retirement accounts, but you don’t have to withdraw from each account.

Also, if you’ve already withdrawn for other reasons, those transactions do count as part of your RMD requirement. Some people end up taking more than necessary, and others withdraw from accounts in which the assets would be better left alone.

Here’s a simple description of how the RMD works:

As stated earlier, with certain types of plans, the process must start the year you turn 70 1/2; unless you’re not yet retired. Calculations are based on the prior year-end (Dec. 31) value of all your eligible retirement plans. This amount is used with applicable IRS life-expectancy tables and rates.

Once the numbers are crunched, a specific amount needs to be withdrawn within the year. This amount can be taken from one account or spread across all retirement accounts held by a given individual. It can also be taken from multiple accounts, but not all. The choice is yours, as long as the amount is correct based on the formula.

You can also take the distribution based on the life expectancy of you and another person. Most often, a spouse is used in the calculation, but you can use children, as well. This may take a bit more planning and structure, but it can be done.

These options can effectively reduce the amount you are required to take out, but when children are used, it can change the way they are permitted to receive the funds upon the account-holder’s death.

Additional planning and consideration is necessary. If you don’t need the money and you want to defer taxes due on withdrawals for as long as possible, it could be advantageous to consider joint life options.

For this next point, I’m pulling the information exactly as it reads on the IRS website. This is regarding penalties for not abiding by the RMD rules: “If an account owner fails to withdraw a RMD, fails to withdraw the full amount of the RMD, or fails to withdraw the RMD by the applicable deadline, the amount not withdrawn is taxed at 50 percent.”

Companies that hold IRAs are beginning to send out notices as reminders. If you have retirement accounts and you’ve already made your withdrawals, you can disregard the notices. It doesn’t mean you didn’t make any withdrawals. Companies send the notices, regardless.

Conversely, if you don’t get a notice, it doesn’t mean the company forgot about you and you get a free year. Ultimately, it’s your responsibility to take the necessary RMD.

Either you or your adviser should schedule the calculations and make sure you don’t miss the withdrawal or make a mistake in calculating it. You don’t want to pay that penalty.

Jerry Citarella is the owner of Infinity Wealth Management 23734 Valencia Blvd., Suite 301, Valencia, (661) 255-9555, ext. 11. He is also the author of “The Truth Helps” series of financial planning books. Mr. Citarella’s column reflects his own views and not necessarily those of The Signal. Submit questions to: Securities and investment advisory services offered through NEXT Financial Group Inc. Member FINRA/SIPC. Infinity Wealth Management is not an affiliate of NEXT Financial Group Inc.


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