(The writer is a Reuters columnist. The opinions expressed are his own.)
CHICAGO, Nov 30 (Reuters) - Nothing good lasts forever, and so it is with tax-deferred retirement saving - that is, the deferred part.
Contributions to traditional IRAs and 401(k) accounts are not taxed upfront, but the U.S. government gets its due down the road. When you reach age 70-1/2, a certain amount of your tax-deferred savings in IRAs and most 401(k) accounts must be drawn down every year under the Required Minimum Distribution (RMD) rules. And younger people need may need to take RMDs on inherited IRAs.
Missing an RMD leaves you on the hook for an onerous 50 percent tax penalty, plus interest, on the amounts you failed to draw on time. But RMDs are easy to forget. Almost half (49 percent) of Fidelity Investment account holders who need to take an RMD had not yet withdrawn anything for 2017 as of early November.
That points toward a last-minute rush, said Maura Cassidy, the companys vice president of retirement. Its a little bit like the last-minute rush to meet the tax deadline in April ... But you want to make sure you do this properly, and it gets more difficult as the holidays approach.
Cassidy notes that the stock market is closed on some days around the holidays, which can slow the time required to settle trades on holdings that might be needed for an RMD. The RMD deadline is Dec. 31, but that falls on a weekend this year, which means any trades you need to generate cash for an RMD must be done before the markets close on Dec. 29.
The one exception: if you turned 70-1/2 years old this year, you have until April 1, 2018, to take your 2017 distribution. However, doing that means you will be taking two distributions in the following year which could have a significant impact on your income taxes.
The amount of RMD you owe is determined by your age, account balance and life expectancy. Fidelity, Vanguard and other large investment firms offer automatic RMD services that will automatically calculate the amounts and make distributions. And Fidelity launched a family of mutual funds earlier this year (Fidelity Simplicity RMD Funds) that combines target date fund allocations with RMD automation.
Although RMDs are calculated for each IRA you own, you do not need to take a separate distribution from every account. You could total up your RMDs and take it all from one IRA one that is a poor performer, perhaps, or one that will help you rebalance an account that might be overweight in equities against your overall allocation plan.
But 401(k) distributions must be taken from each account where an RMD is required. (If you participate in a 403(b) plan, RMDs must be calculated separately for each account but can be aggregated and taken from any 403(b) account.) And no RMDs are required if you still work for the company that sponsors the plan.
Another wrinkle: although RMDs are generally not required on Roth IRAs, they must be taken from Roth 401(k) and other employer-sponsored plans, assuming you no longer work for that employer. The withdrawals are not taxed, but this is an area where some people tend to get confused, said Maria Bruno, senior investment strategist for Vanguard Investment Strategy.
No matter your age, RMD rules are in play if you inherit an IRA. But the rules vary for different types of beneficiaries. A spouse who inherits a traditional or Roth IRA as a direct beneficiary can roll the inherited IRA into her own IRA, taking RMDs on her own age timetable. That is really beneficial if the surviving spouse is much younger, said Cassidy.
Any other inheritor of an IRA - typically a child - has two choices: continue to hold the account as an inherited IRA, or liquidate it. If you hold onto it, RMDs determined by your own life expectancy will be required. Liquidation will incur income taxes that are due in the year you receive the funds.
Retirees below the RMD age should consider planning steps to reduce their future potential impact. RMDs can push retirees into higher tax brackets; they also can trigger higher taxation of Social Security benefits and the surcharge on Medicare premiums paid by high-income taxpayers (http://go.cms.gov/2iHQlhO).
People who have left the workforce with large tax-deferred accounts can do some smart planning between age 65 and 70, said Bruno. Presumably you have moved to a lower marginal tax bracket, so it may make sense to accelerate some of that income, and the tax liability.
That can be done either through accelerated IRA distributions to meet living expense, or through partial Roth conversions. You just want to be careful not to bump yourself into a higher marginal bracket, she said. And if you are on Medicare, youll want to avoid triggering the high-income premium surcharges.
For retirees already required to take RMDs, options are few. But one appealing choice is a qualified charitable distribution (QCD). If you transfer funds directly from your IRA to a qualified charity, that amount can count toward your RMD and be excluded from taxable income. (The annual limit on QCDs is $100,000.)
So even though nothing good lasts forever, at least you will be doing good by doing well. (Editing by Matthew Lewis)