Older retirees again required to tap nest eggs
Note to seniors: Minimum retirement distributions are mandatory again. If you’re over 701/2 and have tax-deferred retirement accounts, you need to take some money out of them — and quick.
“There’s a lot of confusion this year,” said Ken Hevert, vice president of personal retirement products at Fidelity Investments in Boston. “Based on our survey, half of the people didn’t know that retirement distributions were required this year.”
Part of the confusion stems from a temporary suspension of mandatory distributions in 2009. That suspension was meant to help seniors cope with the stock market crash that wiped out billions of dollars in retirement savings. Many seniors complained that enforcing the distribution requirement in a bad market would force them to drain their accounts too quickly, leaving too little money for later years. So the government granted a one-year suspension. For 2009, if you didn’t want to take money out of retirement accounts, you didn’t have to.
In 2010 distributions from IRAs and other tax-deferred retirement accounts are required again, Hevert said. But more than half of the people who responded to a Fidelity Investments survey said they didn’t know that minimum distributions had been reinstated. More than 20% of the people who are required to take distributions haven’t done it, Hevert added. That subjects them to potentially onerous penalties.
The IRS can hit you with a 50% tax — instead of your ordinary tax rate — on the amount that should have been withdrawn if you fail to make the requisite withdrawals, according to IRS Publication 590.
Unfortunately, minimum distribution rules are complex. Many people don’t understand them at all, and others simply find it difficult to calculate how much they need to take.
To understand the rules you have to know the idea behind them, which is simply this: The tax deductions that are provided to people saving for retirement are aimed at giving you a leg up on saving, not giving you the ability to avoid taxes on that income forever.
As a result, once you’ve reached a certain age — 701/2 to be precise — the government wants you to start withdrawing money from tax-favored savings accounts and paying tax on that income. The amount you must withdraw is based on your age, marital status and how much you have saved. Ideally, the government would like you to substantially deplete the account before you die.
Wealthy retirees are the most likely to be affected by the distribution requirement. That’s because most low- and middle-income retirees typically withdraw more than the minimum because they need the money to live on. It’s only the retirees who are wealthy enough not to need significant income from their savings who have to pay attention to these rules, to make sure they’re taking out at least as much as the IRS requires.
If that means you, there are several ways you can determine the right amount to withdraw. You can ask your tax advisor or you can enlist your broker. Fidelity, for example, will calculate the amount its customers must withdraw and set up an automatic system to take the money out.
The Boston mutual fund company also offers a calculator on its website that helps non-customers do the math. (The mutual fund company doesn’t guarantee the results of its calculator for non-clients, but it comes up with the same numbers as doing the long division using IRS charts that are published on the Web.)
If you want to do it on your own, you’ll need to add up all the money you hold in traditional retirement accounts and then divide that number by the appropriate “distribution period” number on the IRS’ required minimum distribution worksheet. You can find the worksheet at https://www.irs.gov.
If your spouse is roughly your age, simply divide your account balance by the distribution period figure in the standard IRS required minimum distribution worksheet. For example, a 71-year-old man with $500,000 in retirement assets would divide by 26.5 to find that the minimum amount he must take from retirement accounts is $18,868 this year. He can take that from one account or divvy up the distribution from several.
The only caveat: There’s a different worksheet for those with May-December marriages. If your spouse is more than 10 years younger than you, make sure you use the alternative worksheet that gives you more time to withdraw your funds.
