More On Tax Planningfrom The Advisor's Professional Library
- IRAs: Eligibility The eligibility rules for contributing to traditional and Roth IRAs are complicated. Learn how to effectively use them in retirement plans.
- Annuities: Variable Annuities Annuities are hot. The tax rules vary with the circumstances. Advisors must be aware of these intricacies when discussing annuities with clients.
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But even that may be better than missing the deadline because the tax on a missed RMD is 50% of the “sum not withdrawn.”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.