Over Age 70? Avoid These IRA Mistakes!

“Over Age 70? Avoid These IRA Mistakes!”



Last week, I discussed some of the tax advantages of using your IRA for charitable gifting.  This week, I’ll focus on IRA planning that needs to be done now in order to avoid costly penalties of missed deadlines.  I am currently working with a client whose wife passed away earlier this year.  Since she was over age 70 ½, a Required Minimum Distribution (RMD) must be withdrawn from her IRA account.  What my client did not realize was that the RMD is still required even though his wife passed away during the calendar year.  In this case, the beneficiary (my client) must take her RMD before December 31, 2006 or suffer a 50% penalty for failure to do so.  This is an easy mistake to make and can be quite costly since the Internal Revenue Service provides few, if any, exceptions to the rule.


In fact, the  Required Minimum Distribution law can be confusing and mistakes are easy to make for anyone who is subject to the  regulations  You are subject to the law if you are over age 70 ½.  If you turned 70 ½ this year, you can either take your RMD by December 31st of this year or wait until April 1, 2007.  In this latter case, you would be required to take two distributions in 2007; one for 2006 and one for 2007.  You must consider all retirement accounts when calculating your RMD.  If you have multiple retirement accounts, it’s easy to forget one.  Again, a miscalculation results in a hefty 50% penalty.  Thankfully, the IRS has made the actual calculation easier by providing a Uniform Lifetime Table.  Here’s what you need to do for the 2006 RMD calculation:


·        Gather your 2005 year-end investment statements for all of your retirement accounts and figure the total values of all accounts combined.  The one exception you need to be aware of is that you are not required to take distributions from Roth IRAs so if you have one, leave it out of your RMD calculation.

·        Now figure your RMD amount by going to the ‘Resource Center‘ at www.welchgroup.com and clicking on “Required Minimum Distributions (RMDs)”.

·        Withdraw the appropriate amount from one or more of your IRA accounts before December 31, 2006.  You do not have to take withdrawals from each IRA separately.  However, if you have funds in one or more employer retirement plans such as a 401(k) plan, you must both calculate and take your RMD from each of those accounts separately.


It’s important to go ahead and take your RMD now rather than wait until the last minute.  Doing so now will give you the opportunity to look at your November investment statements and make sure no mistakes were made.  If a mistake was made, you’ll have time to correct it before year-end.  If you have inherited an IRA account, unfortunately, you have to understand a whole new set of complex rules. I’ll cover this topic in next week’s column.