Don’t Be Fooled by April Fools Day 3/25/07

Stewart H. Welch III, CFP, AEP
Founder, The Welch Group, LLC
3/25/07

Don’t Be Fooled by April Fools Day
3/25/07

“Don’t Be Fooled by April Fool’s Day!”

3/25/07

April 1^st is one of those odd days of the year when it is acceptable to play pranks on people.  However some retirees will get a most unwelcome—and costly—trick from Uncle Sam. Uncle Sam’s trick could cost you a whopping 50% penalty!  Everyone who turned 70½ during 2006 is required to make a Required Minimum Distribution (RMD) from his or her collective retirement accounts by April 1^st of 2007.  If you fail to do so, the federal government will hit you with a 50% tax penalty.  ‘I forgot’ is NOT an excuse that Uncle Sam accepts. 

We have found that many people make mistakes around this issue.  Typical mistakes include:

• Confusion.  Leave it to our government to add confusion to the subject by adding ‘1/2′ to the equation.  This will often trip people up so let’s look at a couple of examples.  If your 70^th birthday was June 15, 2006, you would turn 70½ on December 15^th 2006 and would be required to make an RMD by April 1, 2007 or suffer the 50% penalty.  However, if your 70^th birthday was July 15, 2006, you wouldn’t turn 70½ until January 15, 2007 and you could postpone making your RMD until April 1, 2008. 
• Forgetting altogether.  Time has a way of zipping by and many retires simply forget to take their RMD at all.  This is especially true the first time someone is required to make one.  If you know someone who celebrated his or her 70^th birthday last year, do that person a favor and give him or her a copy of this article.  If the person has forgotten, he or she will owe you a great debt of thanks.
• Take a partial RMD.  Sometimes a retiree will take a distribution from one IRA account but forget about others.  This is perhaps the easiest mistake to make.  Often people have numerous retirement accounts with a number of different custodians.  They may hold an IRA in a certificate of deposit at their bank, another at their brokerage firm.  Your RMD must be calculated based on all of your retirement accounts.

I am often asked if you must take your RMD from each of your retirement accounts.  The answer is NO.  You must calculate how much you owe based on the December 31 balance from the prior year for ALL of your retirement accounts but you can withdraw the RMD from any one or number of retirement accounts. 

There are three exceptions to your calculation of your RMD.  If you own a Roth IRA, it is not subject to RMDs and should not be part of your calculation.  Also, while Inherited IRAs are subject to minimum distributions, they are not subject to your RMD.  Finally, if you are working and have funds in your employer’s retirement plan, those funds are not subject to RMDs until April 1 of the year following your retirement from that company (assuming you don’t own more than 5% of the company).  To calculate your RMD go to the Resource Center at www.welchgroup.com.  Consult with your advisor on this important topic.

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