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Friday November 14, 2014

// November 14th, 2014 // Daily News

Delaying distributions too long may mean a big tax bill

Don’t let the hustle and bustle of the holiday season distract you into a hefty tax penalty come April.
The Internal Revenue Service expects consumers to begin taking distributions from their retirement accounts starting in the year they turn 70-and-a-half or the year when they retire, whichever is later. Fail to do so and the amount you should have withdrawn will be taxed at 50 percent. “It’s one of the biggest penalties in the tax code,” said Ed Slott, a certified public accountant and founder of IRAHelp.com.
Yet it’s a penalty consumers often play chicken with. Of the more than 750,000 Fidelity IRA customers who need to take a required minimum distribution (RMD) this year, 68 percent have yet to withdraw enough. “This is a very, very consistent number that we’ve seen for the last few years,” said Maura Cassidy, director of retirement products for Fidelity. “There are definitely a chunk of these people who only intend to take it in December, wait until the stock market has rebounded, or whatever their mindset is.”
To be fair, procrastinating is actually a smart strategy. Waiting to withdraw gives funds more time to grow tax-free, said Marla Mason, a certified financial planner and a vice president at Presidential Brokerage in Denver. When the market is on an upswing, as it has been, consumers are even more likely to put off making their RMDs until the 11th hour, she said.
Just don’t delay too long. “My rule is, don’t do it after Thanksgiving,” Slott said. Mason encourages clients to take their distributions no later than the week before Christmas.
Why not? Partly it’s a time consideration—it can take a few days for trades to settle and funds to become available for withdrawal, Cassidy said. “You can’t wait and sell on December 30,” she said. A few days with early market closings (2 p.m. Eastern on the days of both Christmas Eve and New Year’s Eve) and closed markets (Christmas Day) can tighten the time frame.
The “mad rush” of last-minute moves also coincides with a week many advisors and brokers take vacation, Slott noted. That can increase the chances of an expensive mistake—a wrongly calculated amount, for example. “I’ve seen cases where people didn’t understand, … and their entire account was closed out in error,” he said.
Brokerages often have resources consumers can tap to make sure they’re withdrawing the right amount, or even to set up automatic withdrawals. The IRS also has worksheets and charts to help determine the correct amount.
Even if you think you have that number nailed down, it can help to have a conference call with your tax preparer and financial advisor to plan for how a withdrawal may affect your tax bill next year, said Mason. You may want to take out more than the minimum to ensure you have enough to live on—or just the minimum to avoid being pushed into a higher tax bracket. Other pitfalls to watch out for:
Unnecessary RMDs. Even if you have multiple individual retirement accounts, you only need to take one RMD from the collection, based on your age and the total value of the accounts. “You don’t have to take it out of each individual account,” Mason said.
Merged-money mistakes. If both spouses need to take RMDs, that cash needs to come from both parties’ accounts, said Slott. Filing a joint return doesn’t mean you could take the entire amount for both spouses from one spouse’s account. “The ‘I’ in IRA is for individual,” he said. “There’s no such thing as a joint IRA.”
Death. If you inherit an IRA, check before year’s end to see if you need to take an RMD. You might. “Death gets you out of pretty much everything in the tax code except for required minimum distributions,” Slott said.
Taxpayers facing the RMD for the first time have a bit of a grace period. In the year you turn 70.5, you have until April 1 of the following year to take that first distribution, said Cassidy. But a distribution on say, March 15, 2015, counts for 2014. You’ll still need an RMD for 2015—and that double withdrawal could have a more significant tax impact.
And if you do forget? The IRS is fairly lenient. “You can attach a Form 5329 to your return,” Cassidy said. “Usually we recommend putting a letter with that explaining why you missed the deadline.” Bad advice from a broker, distractedness over a life event such as an ill spouse, simple forgetfulness—all might be forgiven. It also helps to take that RMD as soon as you realize the mistake. “The intention is to meet the obligation,” she said.

Today’s Inspiration

Build on Solid Foundations

by Joyce Meyer – posted November 14, 2014

For no other foundation can anyone lay than that which is [already] laid, which is Jesus Christ (the Messiah, the Anointed One).
—1 Corinthians 3:11

We can know a lot of spiritual methods(or formulas) for getting things, but many such methods simply have no power flowing through them. Powerless methods are like empty containers— useless.

I had learned many spiritual methods, and I was busy trying them, until I realized that methods don’t work. It was like building on a cracked foundation; nothing stood the test of time. If our foundations leak, we get into trouble every time it storms.

Build your life on who you are in Christ. Take time to meditate on the foundational things about being a Christian. Build your life on the solid foundation that you are an heir of God’s grace and His unmerited favor.