How to avoid paying a 50% penalty tax on your RMDSubmitted by Financial Planning Solutions, LLC on December 14th, 2017
You’ve been a good saver all your life and you recently hit age 70½. You’ve got an IRA but don’t need any money right now. What could go wrong?
A nasty tax, that’s what could go wrong. The IRS lets you accumulate money in your IRA without tax for years but when you finally reach age 70½ they wait no longer. The Required Minimum Distribution rule requires that you take a certain amount out of your pre-tax IRA (or 401(k) or 403(b) plan) so that it can be taxed. The amount you take out is based on certain life expectancy tables.
For example, if you turned age 70½ this fall and you had an IRA worth $500,000 as of 12/31/2016, you would be required to take a distribution of $18,116. If you fail to take this amount out before the end of 2017, the amount you should have taken (but did not) will be subject to a penalty tax of 50%. That’s the IRS’s way of saying that they are pretty serious about you taking out your RMD.
Please note that there are variations on this calculation if you are married and your spouse is more than 10 years younger than you.
RMDs aren’t just for retirees, either. If you inherited an IRA from someone you will need to take an RMD each year. However, it is not as big an amount for a beneficiary that is younger. For example, let’s consider a beneficiary that is 30 years old. Assuming that the IRA owner died in 2016, using the same prior year-end value of $500,000 above, a 30-year-old would need to take a distribution of only $9,381—about half the RMD of the 70½-year old.
RMDs also get tricky if the decedent had already started taking distributions.
‘Got questions? Give us a call, we’re here to help.
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. FPS provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.