It’s hard to believe that 2016 is coming closer to an end. For some individuals that are required to take required minimum distributions (RMDs) from their retirement plans, it may be a good idea to double check to make sure that happens. If it doesn’t the penalties are harsh.
According to the IRS the penalty for not taking and RMD or not taking the full RMD is 50% of the amount not withdrawn. This can lead to significant losses to a retiree that must take RMDs. Generally, most financial planners and or custodians we’ll be able to help the individual and remind them that they have and RMD and how much that amount needs to be.
If an individual finds themselves in the precarious position of having forgotten to take the RMD or did not take out enough, there is a remedy. The IRS allows an individual to file form 5329 and attach a letter explaining the reason why the distribution was not taken.
Additionally, the individual will want to correct the mistake as soon as possible. In other words, the individual will want to call their custodian or financial advisor and instruct them to immediately distribute the amount that was required. This shows a good faith effort on the part of the individual and the IRS may be much more likely to grant the exception.
Finally, individuals holding Roth 401ks are required to take minimum distributions at age 70 ½. Even though the distribution is required the amount distributed will not be subject to taxation. Individuals who would rather not take the required minimum distribution from their Roth 401k can roll their Roth 401k to their Roth IRA. Roth IRAs do not have RMDs. However, it is important to note that the rollover must occur from the principal amount and not the distribution. In other words, an individual is not allowed to take an RMD and roll it into another qualified account. Individuals that must take the distribution but do not want to spend the money can simply deposit the amount into a savings account or an after-tax non-qualified investment account.
Sterling Raskie, MSFS, CFP®, ChFC®
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