(Required Minimum Distributions)
In today’s World, an ever-increasing number of individuals are turning to Individual Retirement Accounts (IRAs) as a primary retirement savings vehicle. The main reason is the flexibility and tax advantages that IRAs offer. There are a lot of different factors to consider when it comes to saving for retirement, and it can be easy to make mistakes, especially if you are not well-versed in the ins and outs of IRAs. One thing often overlooked is taking Required Minimum Distributions (RMDs).
What are RMDs?
More than likely, if you have an IRA, you will be required to take a distribution at some point in time. This means you will have to take a certain amount of money out of your account based on IRS life expectancy tables. The reason is that the government wants to ensure you are using your IRA funds for retirement purposes and not just letting the money sit there and grow tax-deferred.
The purpose of RMDs is to make sure that people don’t use their IRAs as a way to avoid paying taxes on their investments. RMDs act as a way to force people into taking their money out of their IRA and paying taxes on it. The amount that you are obligated to take out each year is based on your age and the value of your IRA. If you do not take your required minimum distribution, you will be subject to penalties of 50% of the amount you should have taken out.
When do I have to take my RMD?
As a big problem with people not taking their RMD is procrastination, the IRS has set up some rules to try and combat this. You are required to take your first RMD once you attain 72 years of age. After your first RMD, you are then required to make annual distributions by December of the subsequent year. April 1st of the year after you turn 72 is generally the deadline, but if you wait until after that date to take your first distribution, you will have to take two distributions that year.
Can the penalty be waived?
The IRS may waive the 50% penalty if you have a good reason for why you didn’t take your RMD. Some individuals may not be aware that they even had to take an RMD, so the IRS may waive the penalty in those cases. Some individuals miss this deadline because they think they can put it off until they retire. Others miscalculate their distribution amount and take too little, resulting in penalties.
The IRS also takes into account things like natural disasters and other unforeseen circumstances when deciding to waive the penalty. For seniors working past 72, your employer may still offer you the ability to contribute to a 401k. In this case, you are not required to take any distributions from your account until after you retire. This is an exception to the rule and is meant to allow people still working to have more time to grow their retirement savings.
To sum it up, one of the significant IRA mistakes to avoid is not taking your Required Minimum Distributions. The IRS has put in place rules and regulations to try and combat this, but it is still something that many people overlook. Ensure you take your RMD each year to avoid penalties. As always, consult with a financial advisor to ensure that you are taking the best course of action for your retirement savings.
Always Be Outstanding and let’s make yesterday jealous of today!
Vincent A. Virga
President ~ PFS Wealth Management Group
Advisory services offered through Madison Avenue Securities LLC (MAS), a Registered Investment Advisor; MAS and PFS Wealth Management Group are not affiliated companies. MAS does not provide legal and tax advice. Seek competent legal and tax counsel for your specific needs.