Funding our retirement is a major focus for most of us. But if you reached 70 1/2 last year, you had better pay as much attention to how much you withdraw from your IRA as how much it is earning.
The government requires a minimum distribution in the year – or before April 15 of the year after – you turn 70 1/2. Mess this one up and it could cost you 50% of what you were supposed to take out, and you will still have to take out the money.
This is Uncle Sam’s way of guaranteeing his tax revenue from the money we struggled to sock away over the last 30 or so years. There is no way the government is going to allow us to pass on all of our tax-deferred savings to our heirs. He will get his piece.
It all seemed so simple back in the ’80s when we started our IRAs. Didn’t it? Well, these distributions are anything but simple.
Most brokers will do the calculation for you and transfer it to another account… a taxable account. But you have to tell them to do the transfer. It is not automatic.
But if your broker has not contacted you about this, you better get moving and get it done.
Here’s a link for a calculator that will figure how much you have to withdraw. It comes to us compliments of Charles Schwab. Just fill in the blanks.
The required minimum distribution (RMD), that’s the official name, will be taxable in the year you do it. So, look for another tax form from your broker in addition to the usual one that reports trades and dividends.
And there’s more. If you turned 70 1/2 in 2013 but did not do your RMD until this year, you will also have to make the 2014 distribution by Dec. 31, 2014. That’s two withdrawals in 2014.
Ouch! Can you say higher tax bracket?
Sorry for the bleak news this week, but it is better than a 50% penalty if you don’t do it. For you slow pokes, if you miss the April 15 and December 31 dates, that’s a 50% penalty for both RMDs in 2014.
Only the IRS can make such a nice thing as saving for the future a pain in the patoot.