Next week begins the roller coaster that is holiday time. You have to shop for gifts; plan elaborate dinners; figure out where you stored the electric carving knife from last year, and out-decorate your festive neighbor with an over-the-top holiday display.
In the midst of all that, you need to keep track of the year-end deadlines for contributions and distributions from your retirement accounts. For the younger crowd, you have until year-end to maximize contributions to your employer-sponsored retirement plans. Maximizing contributions to tax deferred accounts will lower your taxable income for the year. If you are 70 ½ or older, you have until Dec. 31 to take required minimum distributions (RMDs) from your traditional IRA and 401(k) accounts.
If you maintain multiple accounts, you are more likely to make mistakes. While financial institutions should notify you of your required distributions, it is your responsibility to initiate the withdrawal. Moreover, if you established a new account during the year—say you rolled a 401(k) into a new IRA—some institutions may not notify you about required withdrawals until the following year, which may be too late. Unfortunately, mistakes are costly: 50% of the amount that should have been withdrawn. It is prudent to seek the help of a financial adviser or tax consultant if you are unsure.
If you have multiple 401(k)s with former employers, you generally will need to take your minimum withdrawal from each plan to satisfy IRS’ requirements, as you cannot aggregate your 401(k) plans. If you are still employed with the company, you may not be required to take an RMD at 70 ½. However, some 401(k) plans may have specific withdrawal requirements. You should review your plan’s documents or discuss RMDs with your benefits department.
The IRS will allow you to aggregate withdrawals from your 403(b) plans and your IRA accounts. However, RMDs from IRAs must be taken from IRA accounts only, and 403(b) withdrawals must be taken from 403(b) plans only. That means if you have multiple IRAs, you can take your RMD from a combination of the accounts or just one of them. If your total portfolio is overweight in a certain sector or asset class, you can strategically readjust your overall balance by taking your RMDs from overweight holdings.
If you do not need your RMDs for living expenses, there are still tax advantageous options. You can reinvest the money in a taxable account, or if you or your spouse is still working, a Roth IRA. You can also gift your withdrawals to charity to lower your tax bill by way of charitable contributions. As of right now, you are still required to pay the tax on the withdrawal as Congress has not reinstated the charitable distribution rules. You can also opt to have the IRS withhold 100% of your RMD to pay your estimated taxes for the year.
If you inherited an IRA in 2014 with another beneficiary, you may want to consider splitting the IRA into subaccounts before year-end so that each beneficiary can take RMDs based on their own life expectancy, rather than the life expectancy of the oldest beneficiary.
Overall, retirement plans are ripe with opportunities to affect your tax liability before year-end. If you have questions regarding your RMDs the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
