With just six weeks before year-end, millions of seniors have yet to take required minimum distributions from their tax-advantaged savings accounts for 2015. They risk hefty penalties if they fail to act in time.
At age 70½, you must start taking money out of your IRAs and 401(k)s, according to IRS rules. You are required take your distribution by April 1 of the year following the calendar year in which you turn 70½. After that you can wait until Dec. 31 each year. These distributions are taxable as ordinary income and are designed to prevent savers from delaying their tax bill indefinitely. Miss the deadline and you’ll be socked with a 50% penalty.
That’s a big potential hit and should get your attention. Yet at this late date, 67% of IRA holders required to take distributions have not met their full requirement, according to a Fidelity review of more than 800,000 such in-house accounts. In 54% of the accounts, zero distributions have yet been taken.
This isn’t unusual. Two-thirds of IRA holders put off taking any distributions until the age they are required to do so, ICI data show. Meanwhile, many seniors take their required minimum distribution as a lump sum near the end of the year, allowing for maximum tax-deferred growth. But waiting poses risks.
With the holidays approaching you might simply forget. A report by the Treasury Inspector General estimated that as many as 250,000 IRA owners each year miss the deadline, failing to take required minimum distributions totaling about $350 million. That generates potential tax penalties totaling $175 million. The vast majority of those who fail to act on time do so as part of an honest mistake. Tell it to the judge. The IRS doesn’t care.
There is also the chance that you mistakenly use the wrong form or mailing address. These errors can take weeks to correct. A little extra tax-deferred growth isn’t worth taking that chance. Among other reasons IRA owners miss the deadline:
- Switching their account Institutions that open an account during the year are not required to notify new account holders of required minimum distributions until the following year.
- Death Often there is confusion about inherited IRAs. The beneficiary must complete the deceased IRA owner’s distributions in the year of death. Non-spousal beneficiaries of any age must begin taking distributions in the year following the year that the IRA owner died—and no notice of this is required.
With the oldest boomers set to turn 70 in 2016, the issue of procrastination and missed deadlines likely will compound. If you are of age now, consider beginning the process right away. And to make sure you never miss a deadline, consider automating the process. Most IRA and plan administrators will calculate your annual required minimum distribution and send you a check quarterly or yearly.
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