Take 'Em or Pay the Price

Ashlea Ebeling of Forbes wrote an article that more than half of folks who are required by law to take money out of their individual retirement accounts (IRAs) by year end had failed to do so as of the beginning of this month, according to a recent survey from Fidelity Investments. Perhaps these people don’t need the money in their IRAs to meet everyday expenses.

Why should you be concerned over the year-end deadline? If you miss it, the penalty you pay is 50% of the amount you should have taken out in distributions, according to Internal Revenue Service tables.
Here is a recap of the basic rules: IRA owners must normally begin taking annual required minimum distributions (RMDs) after they turn 70½ from their own traditional IRAs or IRAs inherited from a spouse, although not from their Roth accounts. Non-spousal IRA heirs of any age must take RMDs from both traditional and Roth accounts.

The amount you must take out is not arbitrary, but calculated based on your life expectancy and the balance in your IRAs the end of the prior year. There are also some special rules. When you turn 70½, you have until April 1 of the following year to take your first distribution. There is also an RMD required in the year of death, if the deceased is over 70½.

One reason to wait until year end to take your RMD distribution is to let the money continue to grow tax-deferred as long as possible. Another reason to hold off on taking distributions for this year is to see if Congress will reinstate the IRA-Charitable Rollover law, which expired on Dec. 31, 2011. It lets you direct the custodian of your pretax IRA to transfer up to $100,000 per year to a public charity, such as the LIFE Foundation without having to count that distribution in your income. In return, you’ll forego the charitable income tax deduction. But this strategy can leave you ahead whether or not you normally itemize deductions or not.

For more guidance on your IRA, contact your financial advisor.

Marvin H. Feldman, CLU, ChFC, RFC, President and CEO of Life Happens

by Marvin H. Feldman

Marvin H. Feldman, CLU, ChFC, RFC, is president of the Feldman Financial Group in Palm Harbor, Fla., and president and CEO of Life Happens. He is a 41-year Million Dollar Round Table member and was the 2002 president. He is a 33-year member of the MDRT Top of the Table and a past Top of the Table chairman. He also is the recipient of the 2011 John Newton Russell award, the highest honor bestowed on an individual by the insurance industry.

  1. Another benefit: no required distributions. With a traditional IRA, individuals are required to begin tapping their accounts — and to pay taxes on those withdrawals — after reaching age 70½. Roth accounts aren’t subject to mandatory distributions, so the money in a Roth can grow tax-free for a longer period of time.

  2. In a nutshell, contributions to a Roth IRA are not tax-deductible, but earnings grow tax deferred and can be withdrawn tax-free in retirement after age 59 1/2 if the account has been in place for at least five years. In addition, the Roth IRA permits certain early withdrawals without penalty, sets no maximum age limit for contributions and imposes no schedule for withdrawals.

Leave a Comment

Start planning your LIFE today Close