New York Estate Planning & Elder Law Blog
When an individual begins to engage in responsible, comprehensive estate planning, they inevitably end up discussing their retirement savings and investments accounts with their experienced estate planning attorney. One of the most common terms when it comes to these types of assets is required minimum distributions. While retirement accounts themselves can be incredibly complex, a recent article from The Motley Fool helps make understanding required minimum distributions relatively easy and can help you approach retirement and estate planning in a more informed, confident manner.
The Basics
You are required to start taking required minimum distributions from your retirement accounts by April 1 of the year following when you turn age seventy and a half. However, it may end up being a wise choice for you to take the first required minimum distribution the year that you turn seventy and a half instead of waiting until the next year because you will end up getting two in that year as you are also required to take one yearly by December 31. Combining two withdrawals can have a significant impact on your taxable income for the year depending on the characteristics of your account.
For some individuals, it may be wise to begin taking required minimum distributions as soon as you can do so at age fifty-nine and a half. Doing so will impact the amount that you are able to keep and ultimately allow to continue to grow in these accounts, but it might be a smart strategy depending on what your financial plan is. It is especially important to consider these types of decisions as early as possible if you and your spouse each have a retirement account with different characteristics. There are advantages to electing a required minimum distribution from a Roth IRA before a traditional IRA, and vice versa. There is no right answer and it all depends on your personal financial situation, but an experienced estate planning attorney can help you understand the pros and cons of various scenarios and how your choices could impact your estate planning goals.
No matter which age you decide to start taking your required minimum distributions, you will need to determine exactly what amount you are required to take. The IRS provides several worksheets to help individuals determine the amount of their required minimum distribution. Even if you are not quite ready to start thinking about required minimum distributions, it is a good idea to determine what amount you will be required to take so that you can make more informed decisions about other aspects of your financial and estate planning portfolio as you approach the time that is right for you.
Failure to Take Distributions
You may find yourself without the need to take a required minimum distribution, or it could even slip your mind. Neither of these scenarios will work out well for you as the IRS imposes severe penalties on missed distributions, generally equaling 50 percent of the amount you failed to take. That will have a serious negative impact on your hard-earned account balances which will in turn have a negative impact on the assets you are able to pass to your heirs. If you are concerned that you may not need the required minimum distributions, you will still need to plan on taking it and making alternative plans for that income such as gifting or reinvesting it elsewhere to make sure you can avoid harsh penalties for missed distributions.