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An Advisor’s Year-End To-Do List, Pt. 1: RMDs and Harvesting

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As the end of 2015 draws nigh, many advisors will be going through an end-of-year checklist. In this post, we will discuss the first two items on the list and cover the others next week. 

Even though we have discussed some of these in the past, there are a few things that may need your attention as the end of the year draws near.

1)      RMDs

2)      Tax Loss Harvesting

3)      Examine Budget for Following Year

4)      Reevaluate Technology

5)      Refine Marketing Plan for Following Year

To begin our to-do list, let’s start by looking at the complex rules around required minimum distributions from your clients’ retirement plans. 

The required minimum distribution rules establish the minimum amount that must be distributed upon reaching age 70 ½. The RMD rules apply to the following plans:

  • Traditional, SEP, and SIMPLE IRAs
  • Stock Bonus, Profit Sharing, and 401(k) plans
  • 403(b) plans
  • 457 plans

The RMD rules are complex and failure to comply can be costly. These are some of the most important points.

1)      Roth IRA owners have no RMD requirement during their lifetime; beneficiaries of a Roth IRA are subject to the RMD rules after the owner’s death.

2)      Participants in a qualified employer-sponsored retirement plan who elect to work beyond age 70 ½ may continue to contribute to the plan and are not subject to the RMD until they retire.

3)      The RMD must be completed by December 31 each year with one exception (see #4).

4)      The first RMD may be delayed until April 1 of the year following the year in which the participant turns age 70 ½. However, there must be two distributions in that year.

5)      Distributions are based on the appropriate IRS table and the account balance as of December 31 of the year prior to the year the participant turns age 70 ½.

6)      Failure to distribute the minimum may result in a 50% penalty tax on the under distributed amount. This penalty may be waived in certain situations.

7)      A participant may aggregate all IRAs and take their RMD from one IRA. This is also the case with 403(b) plans. However, an IRA’s RMD may not be taken from a 403(b) plan and vice versa. Moreover, the RMD aggregation rules only apply to IRAs and 403(b) plans. All other qualified plan RMDs must be taken from the respective plan.

For more on RMDs, see IRS FAQs.

Tax Loss Harvesting

There are some basic steps to consider that may help reduce your clients’ 2015 income tax liability from investment income.

1)      Does your client have any realized gains for the current year?

2)      Does your client hold any mutual funds or ETFs that expect to distribute a sizeable capital gain for the year? If so and it were sold prior to the distribution, would it create a tax loss to help offset a client’s gains?

3)      Does your client hold any securities you expect to sell which would create a tax loss?

Early- to mid-December is a great time to assess your clients’ tax situation concerning their investment portfolio and make any appropriate adjustments. We will discuss the other items in the EOY checklist next week.

Until then, have a great week and thanks for reading!


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