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Timelines for Taking Minimum Required Distributions
The government wants a piece of your retirement savings — at least
it wants the taxes on your annual minimum required distribution. You didn’t
think that they would let you get away with simply passing on all your
IRA money to your designated beneficiary, did you?
Every year, starting with the calendar year after you reach age 70 1/2, you are
required to total up all your IRA and 40l(k) assets and withdraw a minimum amount,
which can be taken from one or several of your accounts. If you don’t make
the withdrawal, you will pay penalties of up to 50 percent of the amount you
should have withdrawn!
That should catch your attention! The government is serious about getting its
share of your retirement money.
• When? If you turned age 70 1/2 this year, along with millions of other
baby boomers, you have until April 1 of next year (2014) to make the withdrawal.
But since you must also withdraw money for calendar year 2014, and since those
subsequent withdrawals must be made before Dec. 31 each year, you might want
to take your first distribution now, before year-end 2013. That way, you won’t
have to pay taxes on two distributions in one year, possibly putting you into
a higher tax bracket.
Remember, after your initial RMD (required minimum distribution), you must take
your withdrawal before Dec. 31 of each year. You have the option of taking it
at year-end, or having it automatically withdrawn and deposited in your checking
account every month if you use a custodian like Fidelity, which offers this service.
• Exceptions? You are not required to take a withdrawal from a Roth IRA
account. And if you are still working after age 70 1/2, under some circumstances
you can delay withdrawals from an employer’s 40l(k) or 403(b) plan. Also,
if you made non-deductible contributions to your retirement plan, the accounting
gets complicated. You must still make the RMD based on the entire amount in your
plan, but only a portion of the withdrawal, representing deductible contributions,
plus, and all earnings will be taxable.
• How Much? The amount required to be withdrawn is based on a formula determined
by the total amount you have in your accounts, your age and your life expectancy
according to actuarial charts. You don’t have to do the math yourself.
Each custodian is required by the IRS to do the calculation for you. But what
you must do is total up the value of all your accounts unless they are held at
one financial institution, and make sure you take out the required amount — which
can come from one IRA or several, as long as you take the required amount.
To figure out the total value upon which you will base this year’s distribution,
you will use the total valuation as of Dec. 31 of the year preceding the current
year. Then you can make your distribution at the end of the current year — allowing
plenty of time to avoid the year-end rush — or spread the distributions
out over the year. You are going to have to keep careful records.
Speaking of year-end rush, Fidelity recently reported that as of Nov. 1, nearly
two-thirds of their more than half a million IRA customers have yet to take their
MRD for 2013. Obviously this is a challenging issue, and many people wait until
the last minute.
Fidelity offers an automatic RMD service, so you don’t miss the deadline
or make a mistake in your calculations. They will send you a new MRD amount each
Jan. 1 with the calculation details and remind you of the distribution options
you have chosen for those automatic withdrawals, such as the schedule and tax
withholding. Distributions can be taken at year-end or over the course of the
year. Fidelity reports an increase of 152 percent in clients using this service.
• From Where? How Reported? You can take your RMD from one or more of your
accounts. Those withdrawals will be reported as such by each custodian — and
must add up to the total required. They report distributions to the IRS on form
1099R. You will have a copy to file with your 1040 tax return for the year. You
also file Form 5329, which is used to state your MRD, and what you distributed
and from where. The government matches your documentation with Form 5498, which
each custodian sends to the IRS each year, listing all your IRA assets.
After working all these years to build up your retirement assets, now the government
is going to require you to carefully dismantle that edifice, with the goal of
distributing your IRA over your lifetime. If you don’t live long enough
to do this, your heirs will benefit from the remainder. And if you live too long
and run out of money to distribute, the government figures that’s your
There is no rule that requires you to spend all your minimum required distributions.
And if longevity runs in your family, you might certainly want to save some of
that money for a winter day, even though it will no longer grow tax-deferred.
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