More On Tax Planningfrom The Advisor's Professional Library
- Health Insurance: Health and Medical Savings Accounts A Health Savings Account is a trust created exclusively for the purpose of paying qualified medical expenses of an account beneficiary. Although they are popular, they are not without their pitfalls and the regulations can be complicated. Learn more about how to avoid federal taxation on the accumulation and distributions of HSA.
- 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.
Daily headlines on the country’s fiscal situation, broken tax pledges and the political battle lines being drawn to “solve” the problem are enough to freeze anyone in place–doubly so when it’s the most vulnerable among us.
Couple it with time consuming and often confusing paperwork, and it’s understandable why too many individuals of retirement age forget, delay or simply refuse to take their required minimum distributions, despite the hefty tax implications of not doing so.
“I think about folks who don’t have family members helping them track the RMDs–it’s crazy,” said one frustrated baby boomer. “One place sends my mom multiple forms to fill out in tiny print. The annuity RMDs can’t go automatically into a bank account, so I really worry about her losing the checks.”
She’s not alone. As of Nov. 9, Fidelity reports, nearly two-thirds (65%) of the investment giant’s roughly 500,000 IRA customers who are required to take MRDs for tax year 2012 have not yet taken the full amount. Additionally, 54% have not taken any of their RMD to date for the year.
Confusion over basic RMD rules has been a contributing factor, according to the company. Managing RMDs can be a challenging and confusing process due to the complexity of the calculations and IRS regulations.
RMDs generally are minimum amounts that a retirement plan account owner must withdraw annually starting with the year that they reach 70½ years of age or, if later, the year in they retiree, according to the IRS. However, if the retirement plan account is an IRA or the account owner is a 5% owner of the business sponsoring the retirement plan, the RMDs must begin once the account holder is age 70 ½, regardless of whether they are retired.
Retirement plan participants and IRA owners are responsible for taking the correct amount of RMDs on time every year from their accounts, and they face stiff penalties for failure to take RMDs.
When a retirement plan account owner or IRA owner dies before RMDs have begun, different RMD rules apply to the beneficiary of the account or IRA.
Generally, investors who are required to take RMDs have until Dec. 31 of the tax year to do so, but if it is their first time taking an RMD, they generally have until April 1 of the following year.
To help educate the millions of investors who must take RMDs, Fidelity and similar companies offer a variety of resources, including articles about taking RMDs, webinars and RMD calculators.