Tax planning, strategies
This is a very important time for anyone older than 70½ who has a 401k, IRA or other qualified asset.
These people must take out their required minimum distributions before Dec. 31.
The government is your partner in these assets and they want to make sure that they get their share. The IRS publishes a chart that shows how much must be taken in each year after you reach this age. Each year, a larger percentage must be taken than the year before.
If you have multiple qualified accounts, the IRS cares only that you take out at least the minimum for all of your accounts totaled. This means that you do not need to take out proportionally from each account, only the aggregate total. This gives you some flexibility.
The penalty for not taking RMDs is one of the most severe tax penalties. It is 50 percent plus the tax on the full amount you should have withdrawn.
For example, if you should have taken out $10,000, the penalty would be $5,000 plus the tax on the whole $10,000. This could be 75 percent to 85 percent of the $10,000
A recent review of Fidelity IRA customers found that 68 percent of their account holders have not yet withdrawn enough to meet this requirement.
While there may be some reasons to wait, such as seeing where the stock market is headed, you must be very careful. You cannot make the decision on Dec. 30 as it can take days for trades to clear and many people are on vacation between Christmas and New Year’s.
This can slow down the processing of your request. Remember that this is the required minimum so you can always take out more. Give yourself enough of a cushion to avoid the penalty.
It is important to remember that if both spouses are older than 70½ and both have qualified assets, each must make the deduction from their own accounts. Filing a joint tax return does not mean you can take the entire amount out of one person’s account. It is also important to remember if you inherited an IRA during the year, the account still needs an RMD.
Although many people pay more taxes than necessary on their qualified assets, this is normally because they did not proactively plan and not because of penalties. Qualified money can be a tax time bomb. There used to be only two types of taxes people were concerned about, income tax and alternative minimum tax. Today there are five types of taxes that could be in effect. You could also face a phaseout of certain deductions.
Proper tax planning may also reduce the amount of taxes you pay on your Social Security income. This tax can be subject up to 85 percent of this income to taxes. In addition, you must consider questions such as whether you should convert some of your qualified money to a Roth IRA. If you make this conversion, you must pay the taxes at the time of conversion. However, future growth is not taxed and there are no required minimum distributions.
People with large qualified balances may make alternative investment choices to minimize the tax time bomb that qualified money can be. If you have large balances and are older than 59½, you should consult with a tax pro and consider options such as bumping the bracket. If you have balances that you will not need in your lifetime, you may consider a stretch strategy to take advantage of tax deferral over many more years. This could have a huge influence on your legacy. You may even be able to pass on the balance of your qualified assets tax free.
Monongahela Valley Hospital’s Office of Fund Development, is sponsoring an advanced tax planning school 8:30 a.m. to 12:30 p.m. Saturday at the hospital. Tuition is $25, which will be donated to the hospital. To register, call Anne at 724-258-1657.
