Are You Making a Big Mistake?
A recent MarketWatch article listed the 10 most common errors people make with their IRAs.
There were complex issues mentioned like titling and tax problems created by spouses who inherit retirement accounts and withdraw too much, too soon. Lots of things the majority of us will never encounter.
But, the No. 1 mistake investors make with IRAs, and it affects a lot of unsuspecting retired folks, is not taking the required minimum annual distribution, RMD for short.
In fact, Fidelity Investments stated in a recent Journal article that 54% of their half a million IRA customers who are old enough to be required to take a distribution this year have done nothing to meet this IRS requirement.
It’s the first week of December and this has to be done before the end of the year or you face a really hefty fine.
How’s a 50% penalty sound? 50%!
That’s what the fine is for not taking the RMD.
If you turned 70 1/2 this year, you need to get on the phone to your broker and get this done.
Will This Help Lower Your Taxes In Retirement?
When you take money from a tax-deferred IRA or 401(k) and convert it to a tax-free account in a Roth, you will owe taxes on it just as if you had taken the distribution. That’s why so many avoid it.
But according to MarketWatch, there are five excellent reasons to take another look at converting to a Roth:
- First, taxable distributions from a traditional IRA are added to the formula to compute how much of your Social Security is taxed. This could add up to a serious bite from your monthly check. Roth distributions are not added to the formula.
- Next, at 70 1/2 you have to take required distributions from your taxable accounts. Up to this point you controlled how much came out of your IRA, but no more. It will add up…
- Three, when one of you becomes a single surviving spouse, your tax status changes, but your required distributions do not, and the formula for taxing your Social Security will then be based on a single filing status not a couple. That means a bigger tax bite for the surviving spouse. Roths can avoid adding to the problem.
- Fourth, distributions from your traditional 401(k) and IRA will add to the amount you pay toward your Medicare Part B and D premium. After 70 1/2 that amount increases for most people and could cost you a couple thousand dollars a year in increased premiums.
- Last, the lower your taxable income in retirement the lower your affective capital gains tax rate. Roth distributions will not add to your taxable income and therefore will not cost you more in capital gains…
The Best Advice You’ll Get
On the tax side, an efficient distribution strategy can make all the difference for a retired person.
Vanguard says most retired persons withdraw money from tax-deferred accounts first, which is the least efficient way to do it. A well-thought-out withdrawal plan that takes into consideration all the possible tax implications can significantly increase financial security in retirement.
Saving a few bucks by managing your finances is not the same thing as saving a few cents by pumping your own gas or bagging your own groceries. Investing is a whole world unto itself says Vanguard, and most of us need outside expertise to help make it come together. And that is coming from Vanguard – the online brokerage.
Consider the help a financial advisor can provide in the tax, asset allocation and behavior areas.