(Refiling to widen distribution. The author is a Reuters contributor. The opinions expressed are his own.)
By Mark Miller
CHICAGO, March 26 (Reuters) - Seventy may be the new sixty -- but not where the Internal Revenue Service is concerned. People who turned 70-1/2 last year must begin taking required annual withdrawals from their tax-deferred retirement accounts no later than Friday. Yet it seems that some of these seniors didn't get the memo.
Fidelity Investments reports that nearly half (48 percent) of its IRA customers who hit the magic number in 2011 hadn't yet taken their first Required Minimum Distributions (RMDs) as of late December. That percentage was up slightly from 2010, when 45 percent hadn't taken RMDs by that time.
RMDs must typically be taken by Dec. 31 each year; except for the year in which you turn 70-1/2, when you have until April 1 of the next year. The effective deadline for 2011 RMD first-timers is coming up fast. Since April 1 falls on a weekend this year, account owners will have to make their annual required withdrawals by March 30th.
Many seniors dislike taking RMDs, since the withdrawals are taxed at ordinary income rates. But failure to comply is even more painful: you'll face a whopping 50 percent penalty on whatever funds should have been withdrawn in a given year.
"Many of these folks have spent the last 40 years accumulating funds in their IRAs, and never had to start thinking about the distribution phase until now," says Ken Hevert, vice president of retirement products at Fidelity. "It's a new mindset and behavior for them."
The RMD rules apply to traditional IRAs, most 401(k)s and other qualified retirement plans. The rules don't apply to Roths, which require upfront tax payments. The RMD amounts are based on an IRS formula driven by the account owner's life expectancy; the RMD is calculated by dividing the year-end account total by the number of years you're expected to live. (The life expectancy tables used to calculate RMDs can be found in IRS Publication 590 at irs.gov/pub/irs-pdf/p590.pdf)
Many financial services companies remind customers about RMDs through mailings and online communications, and offer online RMD calculators. Some also will calculate RMDs for customers -- but the final responsibility for making the correct RMD payment rests with individuals. Also, IRS form 5498, which is sent to all IRA account holders, indicates if an RMD is due for the coming year (see Box 11 on the form).
Here are some tips to keep in mind when managing RMDs, whether or not you've just turned 70-1/2:
- If you have multiple accounts, you need to calculate the RMD for each IRA separately. But you can aggregate the amounts owed and make the withdrawals from whatever accounts you like. If you have other qualified plans -- such as 401(k)s -- those must be calculated and paid out separately from those accounts. Likewise, if you have an inherited (or beneficiary) account, that RMD must be satisfied separately, too.
One way to simplify the complexity of managing RMDs is to consolidate your accounts at a single financial services provider, which can help you manage compliance.
- If you still need to take your 2011 RMD this year, that won't exempt you from making your 2012 withdrawal by December 31st this year. Beware that this could push you into a higher tax bracket.
- Although most investors take the smallest RMD possible, there's no limit on how much you can withdraw without penalty after you reach age 59-1/2. "It might make sense for people with larger account balances to take out more now while income tax rates are low," says IRA expert Ed Slott.
RMDs can be taken in a single lump sum, or through a series of timed distributions throughout the year. "That's a sort of reverse dollar-cost averaging," Hevert says.
- Consider converting all or some of your tax-deferred holdings to a Roth IRA. A Roth conversion isn't right for everyone, and it's best to analyze this option with the assistance of a tax professional. However, a Roth conversion can alleviate the need for RMDs.
You'll owe income tax on all converted assets in the year of conversion, but assets grow tax-free from that point forward without RMD requirements. A Roth also can be an effective way to pass along tax-free assets to heirs. However, note that you can't satisfy an existing RMD requirement by doing a Roth conversion. Be sure to take whatever RMD you already owe before executing a Roth conversion. (Editing by Lauren Young and Andrea Evans)