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Although many clients may understand the basic rules that apply to retirement accounts, it’s surprisingly easy to miss a deadline, even if there have been no significant legal changes over the prior year. Failure to act before Dec. 31 can have harsh consequences in terms of penalties — and can also cause the client to miss out on valuable tax savings strategies.

Now that we’ve entered the fourth quarter, it’s a good idea to review clients’ accounts and ensure that everything is in order. Planning now can give the client time to consider their options and make the most tax-smart decisions possible before year-end.


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1. The RMD deadline is (usually) Dec. 31.

As most clients know, they’re required to begin taking minimum distributions from traditional retirement accounts (including IRAs, SEP-IRAs and SIMPLE IRAs) by April 1 of the year after they reach age 72. (Roth accounts are not subject to lifetime RMD requirements). The April deadline is the client’s required beginning date and only applies in the first year in which RMDs are required. In most cases, the deadline for taking the RMD is Dec. 31.

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2. Failure to meet the RMD deadline has harsh penalties.

The taxpayer will owe a 50% excise tax on the amount of the missed RMD. (If the taxpayer’s RMD was $10,000 short of the required amount, the tax will equal $5,000.)

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3. The custodian should calculate RMD amounts.

Calculating RMDs can be tricky. The client should receive an RMD notice from the IRA custodian by Jan. 31 of any calendar year that the client is required to take RMDs. The custodian should either provide the amount of the required RMD (which is based on the account balance as of Dec. 31 of the previous year) or offer to provide the calculation on request.

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4. Inherited IRAs are treated differently.

Custodians are not required to provide the RMD amount for inherited IRAs. Most taxpayers who inherit an IRA are required to start taking RMDs each year over a 10-year period if the original owner was already taking RMDs. If the original owner was not taking RMDs prior to death, the taxpayer has 10 years to empty the account, unless the client qualifies as an eligible designated beneficiary or is a surviving spouse (in which case, the taxpayer can calculate RMDs based on their own life expectancy).

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5. The IRS has waived penalties for some beneficiaries.

Taxpayers who have inherited an IRA in 2020 or thereafter should be aware that the IRS has waived the otherwise applicable 50% penalty for missed RMDs for 2021 and 2022. The relief applies only to beneficiaries who inherited accounts, missed required distributions and were subject to the 10-year rule in 2021 and 2022.

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6. Consider a QCD.

Clients can also take steps before year end to minimize the tax implications of RMDs. If the client is already obligated to take RMDs and doesn’t need the funds, they can instead transfer the RMD amount to a qualified charity and avoid paying taxes on the RMD amount.

Qualified charitable distributions can only be made from a traditional IRA or an inherited IRA. The client can transfer up to $100,000 in IRA funds per year to charity. The $100,000 cap is a per-person cap, so married taxpayers can direct up to $200,000 to charity each year so long as each spouse has their own IRA.

If a client is over age 70 ½, a transfer made directly (via a trustee-to-trustee transfer) from the client's IRA to a qualified charity (generally, 501(c)(3) organizations, but not donor-advised funds, foundations or charitable gift annuities) will count toward the client's RMD and is entirely nontaxable. Beneficiaries who are over age 70 ½ are also permitted to make QCDs, so long as the beneficiary also meets all other basic requirements for the transaction.

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7. Consider a Roth conversion.

Clients who have yet to reach their required beginning date may wish to consider executing a Roth conversion to minimize the tax impact of future RMDs. While the taxpayer must pay taxes on the amount converted in any given year, they can then reap the benefit of a tax-free account with no lifetime RMD requirements in future years.

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2022 has been a turbulent year for many taxpayers. Taking steps now to ensure that all year-end planning moves have been executed and all relevant deadlines are met can go a long way toward reducing future tax headaches.

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