A majority of retirees have not yet taken any part of their required IRA distribution, according to a new study. lf they neglect to do so before Dec. 31, they face a hefty 50% tax penalty on the amount they fail to withdraw.
It’s one of the many complicated, and costly, facts of tax-qualified retirement plans: Generally, once you’re 70 1/2, you must start taking an annual distribution from your IRA or other retirement plan (there are some exceptions).
As of Nov. 1, 54% of the more than half a million people over 70 1/2 who own an IRA at Fidelity Investments and who appear to be required to take a distribution have not yet withdrawn any of that money, according to Fidelity. All told, 65% of those customers have not taken their full distribution.
Just don’t forget to do it: An estimated 255,000 taxpayers failed to take required minimum distributions totaling more than $348 million, according to tax data for 2006 and 2007, cited in a 2010 report by the Treasury Inspector General for Tax Administration, the IRS watchdog agency.
For those who don’t need that money for their income needs, delaying their distribution as long as possible can be a smart tax-planning move, said Rusty Ross, a CPA with Exencial Wealth Advisors.
By waiting until the end of the year, “You might have a better picture of what your tax liability is going to be,” Ross said. Those who have underpaid on their taxes can adjust the amount withheld on their required minimum distribution.
“That can be a good tool,” he said. ”You can use that distribution to change the withholding to the point where you avoid underpayment penalties.”
Others might be planning to transfer their distribution directly to a charity, but intend to make that move in December. IRA owners who are older than 701/2 can choose to give that money-up to $100,000 – directly to the charity of their choice (excluding private foundations or donor-advised funds).
They won’t get a tax deduction for the charitable contribution, but that distribution won’t count as income. and so they’ll avoid income tax on it.
That can make even more sense for high-income taxpayers: Turning their IRA income into a contribution may help these taxpayers avoid higher Medicare taxes, for instance, plus reduce their likelihood of hitting the so-called Pease limitation on itemized deductions, which affects taxpayers with adjusted gross income above $250,000 for single filers and $300,000 for joint filers.
IRA-to-charity transfers “are not considered charitable deductions and, therefore, not subject to the Pease limitations,” according to a report on year-end tax planning by J.P. Morgan Private Bank’s Advice Lab.
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