Ronald Fatoullah & Associates - Elder Law

Avoiding Dangers of IRA Required Minimum Distributions


By Ronald A. Fatoullah, Esq. and Jeffrey P. Gorak, Esq.

{4:17 minutes to read} This year the first of the 75 million baby boomers began turning 70. This is a critical age for retirees, because it is at this age (70½) that the IRS requires individuals to begin taking Required Minimum Distributions ("RMDs") from their tax-deferred retirement accounts, including 401(k) accounts and traditional individual retirement accounts ("IRAs"). Careful planning on RMDs is a must, as failure to withdraw RMDs can trigger harsh penalties. Furthermore, improper timing of withdrawals can result in a higher tax bracket for a retiree.

Tax-deferred retirement accounts were created by Congress as a way of encouraging savings for retirement by allowing deposited assets to grow tax-free during the individual's working years. In other words, there is no current tax due on the income placed into a tax-deferred account, nor is there any tax due on any capital gains recognized from selling the assets in such an account. However, when an individual withdraws funds from the account, those withdrawn funds are treated as taxable income in the year of the withdrawal, requiring the payment of the appropriate income taxes.

Individuals may begin making withdrawals from their tax-deferred retirement accounts without incurring a penalty when they have reached the age of 59½ and, as mentioned, must begin making withdrawals at age 70½. The penalty for withdrawing prior to reaching age 59½ and for failing to withdraw the RMD after reaching age 70½ is the same-specifically, 50% of the amount that was actually withdrawn too early or that should have been withdrawn after age 70½ but was not, respectively.

Typically, an individual must take his or her RMD by December 31 of each year. However, this rule is relaxed for people taking their first RMD by allowing such persons to defer their first RMD until April 1 of the year following the year in which the individual turns 70½. For example, if an individual turns 70 in the second half of the year 2016, he will be 70½ in the first of half of 2017 and his first RMD will not be due until April 1, 2018. (If, however, a person turns 70½ in the first half of 2016, their RMD is due April 1, 2017.) This waiting approach can, however, cause a person to end up in a higher tax bracket, because such persons must take their second distribution by December 31st of that same year.

There are several approaches that can help individuals avoid ending up in a higher tax bracket. For example, an individual can convert some of the IRA funds into a Roth IRA prior to that person's turning 70½. By making the conversion, the taxes on the converted portion of the account are paid upfront and the RMD rules no longer apply to the Roth IRA owner. Alternatively, an individual can make qualified charitable distributions from his IRA directly to certain charitable organizations in amounts equal to or greater than his RMD (but in no instance greater than $100,000) with no income tax due on the distribution. Finally, an individual can begin making withdrawals at age 59½, which reduces the amount of the RMD for that person each year, since RMDs are based on that individual's life expectancy.

Retirement is one of the most important life events that many people get to experience, and Americans spend decades building a nest egg for this milestone. However, the rules regarding RMDs and IRAs can cause some individuals to experience heartache due to paying unnecessary penalties or ending up in tax brackets higher than they had expected. It is for these reasons that retirees or those contemplating retirement should seek the advice of a financial planner and an attorney with experience in this area.

Ronald A. Fatoullah, Esq. is the principal of Ronald Fatoullah & Associates, a law firm that concentrates in elder law, estate planning, Medicaid planning, guardianships, estate administration, trusts, wills, and real estate. Jeffrey P. Gorak, Esq. is an attorney with the firm. The law firm can be reached at 718-261-1700, 516-466-4422, or toll-free at 1-877-ELDER-LAW or 1-877-ESTATES. Mr. Fatoullah is also the co-founder of JR Wealth Advisors, LLC. The wealth management firm can be reached at 516-466-3300 or 800-353-3775.

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