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It’s officially crunch time for older savers who must take mandated withdrawals from their retirement accounts.
Individuals who turned 70½ this year — and those who are older — are responsible for taking required minimum distributions from their individual retirement accounts and from each of their 401(k) plans.
Generally, you have until Dec. 31 to take your so-called RMD.
People who just turned 70½ in 2019 may wait until April 1, 2020 to take their first distribution. However, they will still need to take a 2020 distribution by the end of that year.
It’s tempting to push an RMD to the last minute because it’s a taxable distribution, yet procrastination only leads to trouble.
For starters, you’re running out of time to draw up a strategy to mitigate taxes from the RMD.
Further, waiting until the final week of 2019 could raise your risk of making a mistake, including overlooking accounts that are subject to these distributions.
“Don’t wait until the last week of the year,” said Ed Slott, CPA and founder of Ed Slott and Co. in Rockville Centre, New York. “I would get things done early in December.”
Avoid these five missteps as you prepare to take your 2019 RMD.
1. Overlooking accounts
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All RMDs aren’t created equally.
While you can add up your RMDs from your IRAs and withdraw the distribution from one of those accounts, you’re required to calculate and withdraw the RMD from each of your 401(k) plans.
Even the small 401(k) plan you left behind at an employer years ago will call for an RMD.
Hash out the number of accounts you and your spouse own and make sure you pull the appropriate amount from each employer plan.
Don’t forget to also withdraw from Roth 401(k) plans— workplace accounts that use after-tax dollars and have them grow free of taxes. Withdrawals in retirement from these plans are also tax-free.
“Roth IRAs have no RMDs, but Roth 401(k)s do,” said Brian Ellenbecker, senior financial planner at Robert W. Baird & Co in Milwaukee.
2. There are no ‘joint’ RMDs
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You can share everything with your spouse — except your RMDs.
Each of you are responsible for taking your own distributions from your IRAs and 401(k) accounts.
“People assume, ‘What’s the difference?” asked Jeffrey Levine, CPA and director of financial planning at BluePrint Wealth Alliance in Garden City, New York. “You need to take them separately.”
This also means two spouses can’t add up their RMDs and withdraw it from one spouse’s large IRA.
“The ‘I’ in IRA stands for individual; you each take from your own IRAs,” said Slott. “You can’t mix and match.”
3. Incorrectly delaying RMDs
If you’re still working past 70½, you can delay RMDs on your employer’s 401(k) until you retire — if your firm allows it.
People who own more than 5% of the company where they work still must take their RMDs.
Be aware that even if your employer will exempt you from an RMD because you’re still working, you’ll still need to take distributions from your IRAs and other 401(k) plans you hold elsewhere.
“The mistake they make is ‘If I don’t have to take from my 401(k), then I don’t have to take the RMD from my IRA,'” said Slott. “No — it’s just for the 401(k) at the company you’re still working for.”
4. Forgetting inherited IRAs
Grandparents with their grandchildren.
If you hold a Roth IRA, congratulations!
After-tax dollars in this account grow tax-free and can be withdrawn free of taxes in retirement.
Further, you don’t have to take RMDs from your Roth IRA in your lifetime.
The story changes after you die.
A surviving spouse has the choice of assuming the Roth IRA as if it were their own.
Other named beneficiaries may take RMDs by Dec. 31 of the year after the owner’s death, based on their own life expectancy. This is known as the stretch Roth IRA.
“If a non-spouse inherits the Roth IRA, they have RMDs, even though they are tax-free,” Slott said. “If they don’t take it, they are subject to the same 50% penalty.”
5. Failing to give generously
Here’s one more reason to plan as early as possible: If you don’t need your RMD, you can have your custodian transfer the money to a charity.
This move is known as a qualified charitable distribution. Only your IRAs are eligible for this strategy — not your 401(k) plan.
You can’t claim an itemized deduction for donating your RMD, but you’ll avoid income taxes on the amount transferred.
“You still get a tax benefit from charitable contributions, even if you don’t itemize,” said Nathan Rigney, lead tax research analyst at the Tax Institute at H&R Block.