YEAR-END PLANNING: Watch Out for the Required Minimum Distribution Rules to avoid Penalties

by: Jeffrey M. Fetter

Taxpayers subject to Required Minimum Distribution Rules (RMDs) on their retirement accounts must plan carefully to ensure that they are not subject to significant penalties for failure to withdraw enough from their retirement plans.  Taxpayers must start taking annual RMDs from their traditional IRAs by the April 1 following the year in which they attain the age of 70 ½.   401(k) plan owners are subject to the same rules.  If you have other plans, it is important to review the requirements applicable to you with your tax advisor.

If a taxpayer fails to withdraw the required RMD amount, penalties equal to 50% would apply to the excess amount that should have been withdrawn under IRC Section 4974. Remember that a separate RMD calculation is used for each IRA that a taxpayer may have, so don’t assume that what applies to one, applies to the other.  Again, a conversation with your tax advisors is recommended because there are certain strategies that may help you avoid either the penalties for failure to withdraw enough or result in taking more than you need to or want to withdraw.  For example, the aggregate RMD for multiple IRAs may be added together and the amount required may be paid from any of the IRAs – – but careful attention to detail is necessary.   Another reason why it is especially important this year to have a clear understanding of the rules applicable to you is because of the volatility of the market, its ups and downs and how present account values may be different than earlier in the year.

If you would like to discuss how these rules may be applicable to your situation, please do not hesitate to contact us.