The top of the year-end checklist typically includes making certain to send a donation to a favorite charity by Dec. 31.
year, though, some accountants say you don't want to make those
donations until January - if you're betting on higher tax rates in 2013.
what about grabbing some money from an IRA? Will you or an older family
member withdraw the entire required minimum distribution from your IRA
by Dec. 31? This is one where you don't want to drag your feet.
year, many investors simply miss the deadline for taking the required
withdrawals from their IRAs, said Ken Hevert, vice president of personal
retirement products for Fidelity.
"It can really get complicated," Hevert said.
issue isn't just that you're missing out on getting extra money to
cover bills. You could be creating a very costly tax headache, too.
age 70 1/2 and older must follow required distribution rules when it
comes to IRAs. The same can apply to a 401(k) if you're retired and no
longer working at that company.
Typically, investors who must take required minimum distributions have until Dec. 31 each year to withdraw the full amount.
if you turned 70 1/2 in 2012, you'd have until April 1, 2013, to take
that required first distribution, and you'd have to take one for 2013 as
The distribution is calculated based on life expectancy and how much retirement savings you've built up.
experts say the IRS is aware of "growing non-compliance" with IRA
distribution requirements, too, and is expected to crack down further to
capture losses in tax revenue.
More than 250,000 taxpayers fell
short of taking the required distributions in 2006 and 2007, by almost
$350 million, according to federal statistics.
The estimated tax
revenue loss those two years was about $174 million, according to a 2010
report by the Treasury Inspector General for Tax Administration.
issue becomes more important as Baby Boomers age. The required minimum
distribution can boost your taxable income in a given year.
The required minimum distribution rules do not apply to Roth IRAs. There's no age at which you must start taking distributions.
Various online calculators and financial planners can work with you to figure out distributions.
example, if you're 71 now and had $100,000 in an IRA as of December
2011, the required minimum distribution could be $3,773.58 in 2012,
depending on your situation.
Hevert said about half of Fidelity's
IRA customers set up a system with the firm so that Fidelity
automatically sends the required minimum distribution. But about half
make sure to take those distributions on their own.
Yet, time can go by and you forget to do what's necessary.
of Dec. 9, just under half of Fidelity's more than half a million IRA
customers who are required to take distributions for 2012 had not yet
taken the full amount.
Granted, many may plan to do so in the next week or so - but others can forget.
The rules can be extremely confusing, too.
special attention if you took a lump sum from your pension plan.
Retirees from General Motors, Ford Motor and others who traded in
monthly pension checks for lump-sum distributions - then rolled that
money into IRAs - will need to watch the distribution rules as well.
retirees who took lump sums from pension plans will be thankful to
know, though, that the required minimum distributions for 2012 won't be
based on any new money that was rolled into the IRA this year.
required distribution is based on the previous year's balance. So for
the 2012 tax year, that's the balance as of Dec. 31, 2011.
2013 distribution will be based on the Dec. 31, 2012, balance," said Ed
Slott, an IRA expert whose website is www.irahelp.com.
There are other factors to consider if you've inherited an IRA from Mom or Dad or a beloved aunt or uncle.
you inherit an IRA from someone other than your spouse, the rules are
complicated, and you may not get to wait until 70 1/2 to take out money.
Say Dad died at 79 in 2011 and his daughter Mary is 50 and is the
beneficiary. Mary has until the end of 2012 in this example to take the
required minimum distribution.
If you forget to take a required minimum distribution, the tax penalty is steep.
The penalty is 50% of the difference of what you should have taken out and what you took out.
it is possible to correct the problem by filing Form 5329, Additional
Taxes on Qualified Plans (Including IRAs) and other Tax-Favored
Accounts. You'd request a waiver of the 50% penalty.
If you should have withdrawn $1,000 from that IRA but didn't take out any money, the penalty would be $500.
form has six pages of instructions. But the IRS can waive part or all
of that penalty if you show you made a reasonable mistake and took
remedies to make certain to take the required minimum distributions.
It's best to avoid the mistake.
Where to find help online.
IRS Publication 590 for rules about IRAs. www.irs.gov
Some useful retirement web sites: www.401khelpcenter.com and www.irahelp.com.
you forget about a distribution, talk to your financial planner or
accountant and see Form 5329, Additional Taxes on Qualified Plans
(Including IRAs) and other Tax-Favored Accounts. You'd request a waiver
of the 50% penalty.
Bankrate.com has a calculator to help you figure required distributions.