The end of the year is approaching, which means many seniors are considering how their holidays are going to look in the face of our ongoing COVID-19 pandemic. However, one thing that might not be top of mind is making their Required Minimum Distributions (RMDs) from retirement accounts, such as IRAs and 401ks. That could be a big problem, since failing to make the RMDs could end up costing senior citizens quite a bit of money. Many experienced Pittsburgh elder law attorneys are starting to remind their clients who turned 70 before June 2020 that they could face a 50% tax penalty if they don’t make their RMDs by December 31st.
What is a Required Minimum Distribution?
Required Minimum Distributions are meant to close loopholes in retirement accounts. For example, some retirees who are financially secure enough to live without making distributions from their retirement accounts could take advantage of an unfair tax deferral. RMDs require that seniors take distributions from their tax-favored retirement accounts beginning in the year they turn 70 ½ years old, with a one-time extension put in place for those who turn 70 after June of that year.
The 50% Penalty
Seniors citizens risk being penalized by the IRS in the amount of 50% of the amount that should have been taken out if they do not make an RMD. This could be a huge amount and should serve as the number one reason to not forget about making the RMD.
It should be noted that some retirement accounts, such as Roth IRAs and 401ks, do not have RMDs. That’s because the amount of money you convert from the Roth IRA is taxed at the current income tax rate.
How Much Do I Need to Take Out of My Retirement Account?
The answer to that question depends on your life expectancy. However, a good rule of thumb is that it should be equal to about one year’s share of the IRA or 401k’s principal. To find out the exact amount, you can take a look at the IRS’ formula that determines how much the RMD needs to be based on your age and life expectancy. It should also be noted that as you age, the amount of the RMD tends to grow.
If you have any questions about making Required Minimum Distributions or want to plan strategies for leaving your retirement accounts to later generations, please contact us at 724-841-1393 to set up a consultation.