Source: MSN Money
Pulling money from your retirement accounts is trickier than you might expect. A misstep with your required minimum distribution can lead to expensive penalties.
Savers typically must start taking out money from their individual retirement accounts once they turn 70½. For 401(k)s and other defined contribution plans, it’s either when you turn 70½ or when you stop working at your current job, whichever is later. If you’ve inherited an IRA, you might also be subject to RMDs, even if you’re years away from retirement yourself. If you fail to take out the required sum, you are subject to a 50 percent penalty on the amount you should have withdrawn. “You are forced to take that money out, and you have to understand the rules,” said Ed Slott, founder of Ed Slott & Co. “And it’s very confusing.”
The last day to take your RMD this year is Dec. 29. Many savers wait until the last minute, according to Fidelity. As of November, almost half of its IRA customers had yet to take out any money to satisfy their RMDs for this year. Watch out for these common mistakes if you still have to make your withdrawal this year. 1) Taking from the wrong accounts When looking at your RMDs for the year, take inventory of all of the accounts you own that are subject to these rules, Slott said. This could include IRAs, as well as 403(b) or 401(k) plans. Be careful where you take out that money. You cannot satisfy an RMD from one type of account — say an IRA — by taking money out of another type of account, such as a 401(k), said Slott. “The IRAs have to be taken from IRAs. The 403(b)s have to be taken from 403(b)s,” Slott said. But if you have multiple IRAs, you can take the total amount out of any one of those accounts or any combination of those accounts. If you have multiple 401(k) plans, each account will have its own RMD that needs to be withdrawn. 2) Forgetting the “I” in “IRA” Married couples often make the mistake of thinking that because they file a joint tax return, they can also choose which partner’s IRA from which to take an RMD. “There’s no such thing as a joint IRA,” Slott said. “The husband has to take his RMDs from his own IRAs. The wife has to take her RMDs from her own IRAs. They can’t take one from the other.” Not following the rules can cost you. If a couple messes up and takes both RMDs from the husband’s account, for example, the husband takes more out than he has to and consequently pays more tax on that money. At the same time, the wife is subject to the 50 percent penalty on the RMD she did not take from her account. 3) Rolling over RMDs Many savers make the mistake of thinking they can take the RMD from their IRA and convert it to a Roth IRA tax-free, Slott said. But the law prevents you from putting a distribution in another tax-advantaged retirement account. “That has to come out and it cannot be converted or rolled over,” Slott said. Once you’ve satisfied your RMD for the year, however, you can convert the remaining portion of your traditional IRA to a Roth (although you’ll pay taxes to make that conversion). 4) Missing charitable opportunities Something many retirees forget about: You can do a direct transfer in the amount of your RMD from your IRA to a qualifying charity. Savers can accomplish this by using what is called a qualified charitable distribution. Transferring the money directly to charity is more efficient than taking the money out, paying tax on that money and then subsequently taking a deduction for your donation, Slott said. There are restrictions on this strategy, however — it only applies to IRAs, not company plans. You also must be 70½ or older. 5) Paying tax twice You may have money in your IRA that you have already paid taxes on, say if you rolled over after-tax funds from a 401(k). You need to include that information when calculating your RMD for your IRA, Slott said. You can find the details on Form 8606 when you do your taxes. “Make sure you get credit for money you’ve already paid taxes on,” Slott said. “Part of your required minimum distribution may be coming back to you tax-free, so don’t miss out on that one.” 6) Not taking RMDs on inherited accounts Beneficiaries typically still have to pay RMDs on the money they inherit from 401(k)s or IRAs. But RMDs for beneficiaries are calculated differently, so seek the advice of a financial professional to make sure you take out the right amount of money. One area where inheritors frequently get tripped up is Roth IRAs, said Slott. Account owners generally do not have to take RMDs on Roth IRAs. But once they die and the account is inherited by a nonspouse (such as a child or grandchild), they are subject to RMD rules. The RMD will be tax-free for those account owners, but they still need to take the money out, Slott said. If they fail to take the money out, they will have to pay a 50 percent penalty for missing that distribution, he said.