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.