The end of the year will be here before we know it and we all know how busy that time can get for us. That’s why I wanted to mention a few items regarding IRAs that you’ll want to address before the holiday season is upon us.
Required Minimum Distributions (RMDs).
This is an annual IRA withdrawal requirement for all of us who have reached the seasoned age of 70 ½. It also is a requirement if you inherited an IRA, regardless of your age. There are special IRS tables that are used to calculate the annual amount. The good thing is that most brokers/custodians provide this service for you but you should verify the amount, especially if you have more than one IRA. If you miss taking your RMD, you will get hit with a huge 50% penalty on any distribution amount that you should have taken. By the way, RMDs are not applicable for Roth IRAs, unless it is an inherited Roth IRA.
Roth Conversions
The biggest IRA planning change in the Tax Cuts and Jobs Act signed into law in 2017 was for Roth conversions. Beginning in 2018, conversions can no longer be reversed. They will be permanent and the tax will be due once the funds are converted. Roth conversions are still valuable in the right circumstances, but now any conversions contemplated for 2018 must be carefully planned and the tax bill accurately projected. Unlike an IRA contribution, which you can make until April 15th of the following year, to qualify for a Roth conversion this year the funds must leave your IRA by year’s end.
Check Withheld Taxes on RMDs
Make sure that you had enough money withheld to pay the taxes for your RMDs to avoid underpayment penalties by the IRS. The tax withheld is deemed to be paid evenly throughout the year and satisfies the estimated tax payment timing requirements. If RMDs are your main source of income, having taxes withheld each time you take a RMD is much easier than writing checks and mailing out estimated tax payments.
10% Penalty Exception
If you are under age 59 ½ and had to withdraw early from your IRA this year, you may qualify for an exception to the 10% penalty. If you do, the payment qualifying for the exception must be made in the same year as the IRA distribution. This is sometimes missed at year-end, which voids the exception and forces you into a 10% penalty that could have been avoided. This would likely affect those who needed the money and cannot afford that penalty on top of their tax bill.
Change Beneficiaries as Needed
It’s always a good idea to check your beneficiaries on your IRA accounts as well as any other retirement plans or life insurance policies that you may own. I can’t tell you how many times I have reviewed beneficiary forms that have had deceased or divorced spouses on there as the primary beneficiary! Changing these after the fact are time consuming and costly, if they can be corrected at all.
Address this stuff now because time flies and we’ll be ringing in the new year before we know it.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
