March 28, 2011

Big Tax Bite Awaits Retirees Who Miss April 1 Deadline for Plan RMDs

Fidelity urges advisors to make sure clients who turned 70-1/2 in 2010 take their RMD in time, so they don’t face a 50% tax penalty

More On Tax Planning

from The Advisor's Professional Library
  • Precious Metal Taxation Precious metals can be used to better diversify a portfolio but can be volatile. The tax implications of investing in these types of assets vary depending upon the situation.
  • ETF Taxation The use of ETFs may be attractive to certain investors. The tax advantages may make them even more attractive.

Fidelity Investments estimates that “1 million people who turned 70-1/2 in 2010 have until April 1 to take their first annual distribution from their IRAs and 401(k)s,” according to an email to AdvisorOne on Monday from spokesman John Eidson.

Fidelity points out that this deadline extension for the required minimum distribution (RMD) is only for first-time distributions for those who turned 70-1/2 in 2010. Those who take advantage of the extension will also have to take their 2011 distribution before Dec. 31, 2011, which means two RMDs—from 2010 and 2011 in the same year, which may, according to Fidelity, “put them in a higher tax bracket for that year, significantly increasing the taxes owed,” the e-mailed alert notes.

But even that may be better than missing the deadline because the tax on a missed RMD is 50% of the “sum not withdrawn.”

Congress gave retirees a one-year moratorium on RMDs during the financial crisis, with legislation that said for 2009, there was no RMD requirement.

“It’s important that advisors explain the RMD process clearly to their clients—especially those that turned 70-1/2 in 2010 and are taking their first RMD. The suspension of RMDs in 2009 along with all of the other new legislation that has come down the pike recently has made the process confusing for a lot of folks. Advisors have a great opportunity to be a source of education on the topic and in turn strengthen their relationships with their clients,” Eidson said in a separate e-mail to AdvisorOne.

However, RMDs do not apply to Roth IRA and Roth 401(k) accounts, which is one of the reasons to "consider a Roth conversion," Eidson says.

Reprints Discuss this story
This is where the comments go.