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This Mistake Can Cost You A 50% Tax Penalty On Your Retirement Fund

As the year is gradually moving to an end, you need to be warned. Those who are 70 and a half years or older should remember to take the required minimum distribution.

RMDS refers to the amount a person has to withdraw from pre-tax retirement accounts yearly. The sum deducted is subsequently added to the year’s taxable income. However, just as it happens when people have to file their tax returns, several individuals keep procrastinating each time they are supposed to withdraw this sum yearly.

As a reminder, a failure to deduct this sum may attract a 50% tax penalty on the sum of distribution you ought to have taken. So, you lose more by failing to withdraw this RMD.

RMDS refers to the amount a person has to withdraw from pre-tax retirement accounts yearly.

Data released late October revealed that only about 50% of the customers of Fidelity who have IRAs and who are expected to take out this required minimum distribution have actually taken them. The percentage does not put into consideration whether the customers also run accounts with other firms in which case there could be a possibility that they have taken the distributions from those other accounts.

Calculation of RMDS

The specific amount you are expected to take as required minimum distribution is calculated putting all retirement accounts you have into consideration. However, it is possible to take out the entire distribution from just one of those accounts in a case where you have more than one individual retirement account.

Note that if yours is a mixture of accounts, like 401(k)s and IRAs, then you have to take the RMDs separately. Thus, if you still haven’t taken your RMD in 2018, you need to start the process soon so you get done before the deadline on December 31st.

Required minimum distribution is calculated putting all retirement accounts you have into consideration.

According to Fidelity’s retirement income’s vice president, Keith Bernhardt, give yourself a minimum of 5 to 6 days beforehand. If you decide to call your firm or if the market is currently volatile, then reaching them via phone may not be easy and so you could give yourself an extra week.

Processing Your RMD

According to Bernhardt, starting the RMD request process early will give you sufficient time for selling out security, allowing the settlement of the sale in the account and freeing up the cash. It is worthy to bear in mind that the period it takes to complete the process differs based on the firm where you are taking out the RMD.

When taking out the annual distributions, there are certain tips that could be of help.

  1. Go easy while calculating

Firms such as Fidelity offer you calculation for the exact amount you actually need to remove from your retirement account with them. Note that this calculation only covers your funds at the firm and if your money is invested somewhere else, you have to calculate the exact amount to remove from the accounts.

Bernhardt noted that even though it is possible to take out the RMD from a single account in a case where you have more than one IRA, the distribution to be taken out necessarily has to put all your accounts into consideration.

Some firms offer you calculation for the exact amount you actually need to remove from your retirement account with them

2. Donate To Charity If Possible

Tax Cuts and Jobs Act which was passed in 2027 has introduced a new twist to charitable donations. Standard deduction is now larger and so a lot of individuals will be unable to list and also take the deductions for the sum given to charity. However, donation of your RMD to charity through an appropriate charitable distribution would mean you don’t have to list your deductions before you benefit from that tax advantage. Bernhardt added that the money should go to charity straight from the account and that way it does not appear in your own taxes. Thus, it won’t affect yor Medicare premiums or Social Security taxes. Note that qualified charitable distributions have to be directly sent to the qualifying charity. As such, donating to donor-advised funds don’t count.

3. Keep It Invested

The fact that taking out the money is a requirement doesn’t necessarily mean you must spend it. Bernhardt said it is okay to let your money go out of an IRA straight to yor brokerage account.

4. Consider automatic withdrawals

This may be helpful for future RMDs. Fidelity, for instance, lets the customers choose the exact time they want the payments withdrawn, either monthly or a one-time payment. Doing that means you don’t have to be worried about deadlines. According to Bernhardt, they suggest automatic to their customers. That means they do not have to bother calling in, neither do they have to bother about forgetting. The firm does the math on their behalf.

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