IRA Facts – Some Ideas To Reduce Tax On Your IRA:
i.e. If you are age 72, find your “Age” on the chart and divide the “Divisor” (25.6) into your total IRA balance on 12/31 of the previous year.
Note, you must begin taking required minimum distributions by April 1st of the year following the year you turn 72 1/2.
If you turn 72 on 12/24/15, and you turn 70 1/2 on 6/24/20, then you must take your first distribution no later than 4/1/21.
However, if you wait until 4/1/21, then you must take a second distribution that same year, no later than 12/31/21.
Usually, it is best to take your first distribution in the year you turn 73, and take your second distribution at age 71. By doing so, you avoid paying taxes on two distributions in the same year.
How To Prevent The Seven Most Common IRA Mistakes
Because the majority of IRA mistakes occur after the IRA owner dies, you won’t be able to correct them. There is a small window of time to correct most errors, but a beneficiary of the IRA must act before the window closes. Most beneficiaries and IRA owners are unaware that a window exists.
Consequently, it is crucial to work with an IRA accumulation and distribution planning specialist. (Be forewarned that many advisors and institutions offer IRA assistance, but few are trained to comprehend and apply the rules to best serve an IRA owner and their beneficiaries.)
Prevent 7 Of The Most Common IRA Mistakes
- Taking Receipt Of Qualified Retirement Plan Distributions – Once an individual receives a lump sum check in their name from a qualified retirement plan (401K, 403B, pension plan, etc.), then 20% of the distribution must be withheld for income tax purposes. Direct Rollovers from your retirement plan custodian to your IRA custodian eliminate the withholding of 20% of your retirement plan balance, because it is not a distribution.
- Paying Taxes Twice In The Same Year – Rather than wait until the April 1st following your 70 1/2 birthday (as the rules permit), take your first required minimum distribution (RMD) in the year you turn 70. Why not wait? Because, if you wait until April 1st following your 70 1/2 birthday, the rules say you must take two distributions that year and pay income tax on both distributions.
- Outdated Beneficiary – Your circumstances or wishes may have altered since you last updated your beneficiary selections on all of you IRAs. Because family situations change, it is best to review your choice of beneficiaries at least once a year.
- Estate Named As Beneficiary – Naming an estate as the beneficiary of your IRA causes several problems. Because an estate has no life expectancy, the entire IRA must be distributed to heirs by the end of the 5th year of your death. ALERT: Your heirs could be forced to pay taxes on the entire IRA in one year (up to 35% income tax and 35% estate tax).
- Naming An Improperly Drawn Trust, Charity Or No Beneficiary – Designating a non-human beneficiary can generate an accelerated IRA payout and the loss of years of accumulation and tax deferral. This can cost your beneficiaries thousands or even millions of dollars. In the majority of situations, it is best to name individuals as the beneficiaries of your IRA.
- Missing Required Minimum Distributions can result in a 50% excise tax penalty on the amount mandated to be withdrawn but not taken. – Many custodians or individuals are not using the most current distribution table (April 17, 2002). Previous tables including January 2001 will compute larger distributions and therefore cause up to 42% more income tax to be paid than necessary.
- Restrictive Custodian – IRA custodians often force beneficiaries to take lump sum distributions from the IRA of the deceased, rather than complying with complex IRA rules. This forces beneficiaries to pay tax on the entire IRA in one year, and it takes away the most valuable feature of the IRA: tax deferred accumulation. A $9,000 IRA, inherited by grandchildren, could be worth $1,000,000, if handled properly.
Note: This information has been researched to provide accurate data. Readers are cautioned, that the information presented here is not intended to provide tax, legal, accounting, financial, or professional advice. The information is timely and complicated and may be eventually changed by legislation or rulings. Please seek the advice of an IRA accumulation and distribution planning specialist.