Avoid these com­mon IRA mis­takes

Con­se­quence of not tak­ing RMDs can be se­vere — and costly

USA TODAY US Edition - - MONEY - Robert Pow­ell Pow­ell is ed­i­tor of Re­tire­ment Weekly and con­trib­utes reg­u­larly to USA TODAY, The Wall Street Jour­nal, TheStreet and Mar­ketWatch. Email rpow­ell@allth­ingsre­tire­ment.com.

Nearly four in 10 house­holds in the U.S. own an in­di­vid­ual re­tire­ment ar­range­ment or IRA. And that means some 50 mil­lion house­holds might some­day make a costly and per­haps ir­rev­o­ca­ble mis­take when it comes time to take re­quired min­i­mum dis­tri­bu­tions — or RMDs — from those ac­counts.

Ac­cord­ing to Un­cle Sam, you gen­er­ally must start tak­ing with­drawals — RMDs — from your IRA, SEP IRA, SIM­PLE IRA or re­tire­ment plan ac­count when you reach age 701⁄ 2. Your RMD is the min­i­mum amount you must with­draw from your ac­count each year. And ac­cord­ing to the IRS, the be- gin­ning date for your first RMD for IRAs, in­clud­ing SEP and SIM­PLE IRAs, is April 1 of the year fol­low­ing the cal­en­dar year in which you reach age 701⁄ 2. For 401(k), profit-shar­ing, 403( b) or other de­fined con­tri­bu­tion plans, it’s gen­er­ally April 1, fol­low­ing the later of the cal­en­dar year in which you reach age 701⁄ or 2 re­tire.

Sounds sim­ple, but re­tire­ment ac­count own­ers make plenty of mis­takes when it comes to RMDs. Here’s a look at some of the com­mon mis­takes made:

uYou need to

take your RMD. “The most com­mon mis­take is ei­ther some­one not tak­ing RMDs from their qual­i­fied ac­counts or not enough,” says Thomas O’Con­nell, pres­i­dent of In­ter­na­tional Fi­nan­cial Ad­vi­sory Group.

And claim­ing ig­no­rance when you for­get to take a dis­tri­bu­tion is no ex­cuse. “Think­ing and be­liev­ing that ‘no one told me about the rules’ is a valid ex­cuse for miss­ing or mess­ing up the amount you take for your RMD,” says Matthew Curf­man, the pres­i­dent and co-owner of Rich­mond Broth­ers. uAre you still work­ing past

age 70? More peo­ple are work­ing un­til or past age 70, says Joseph Clark, a man­ag­ing part­ner with The Fi­nan­cial En­hance­ment Group.

“They seem to for­get the tech­ni­cal rule is you must take an RMD the year af­ter the year you turn 701⁄ 2,” he says. “But if you wait you must take two dis­tri­bu­tions the fol­low­ing year and the first prior to April 1. This is im­por­tant when peo­ple have large pay­outs their fi­nal year of work.” uOwn a 401( k) and still work­ing ?

Many ac­count own­ers don’t know if they can de­lay tak­ing their

RMD if they own a 401(k) and are still work­ing.

“As­sum­ing you are not a ma­te­rial owner — that is, you own less than 5% of a busi­ness spon­sor­ing the plan — you don’t have to take an RMD from a 401(k) while work­ing,” Clark says. “You do, how­ever, have to take the RMD from IRAs re­gard­less of work­ing or not when you reach the 701⁄ mark or the year af­ter. 2

uAg­gre­gate ac­counts

where pos­si­ble. Ag­gre­gate and con­sol­i­date your IRA ac­counts and your 403( b) ac­counts, when pos­si­ble. This sort of ag­gre­ga­tion, Clark says, is con­fus­ing to pro­fes­sion­als, es­pe­cially in the aca­demic world where they have 403( b) ac­counts and IRAs at the same cus­to­dian.

Of note, the con­se­quence of not tak­ing the cor­rect RMD from the right ac­counts is se­vere. “The penalty for a missed RMD or less than full RMD is a 50% penalty plus in­ter­est on what was not taken,” O’Con­nell says.


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