Posted on 12/28/2016 3:01:42 PM PST by Libloather
Nearly a third of retirees are playing chicken with one of the steepest tax penalties out there — and they are running out of time.
IRS rules on so-called required minimum distributions generally kick in once you reach age 70½. For 401(k)s and other defined contribution plans, it's either when you turn 70½. or you retire, whichever is later. If you've inherited an IRA, you might also be subject to RMDs, even if your own retirement is years away.
How much you need to take is usually based on the account balance at the end of the previous year, and your life expectancy based on your age. Fail to withdraw enough, and there's a 50 percent penalty on the shortfall.
(Excerpt) Read more at msn.com ...
The penalty is an example of effective law. The punishment is so stiff, everyone complies.
Financial institutions sometimes make mistakes. This morning I spent over an hour on the phone with a rep from a well-known financial management firm which incorrectly moved about $20k out of an account that I could readily withdraw funds from and into an annuity-type account which would have only permitted withdrawals spread over a five year period. I knew this was a mistake because I had explicitly instructed them to leave that account alone. The rep finally tracked down the source of their error, apologized, and said that the transaction would be reversed. Fortunately, I looked at the confirmation statement for the erroneous transfer and immediately recognized that something was wrong.
The former Soviet Union had what they called an “anti-parasite” law which threatened imprisonment for anyone who was unemployed. Not surprisingly, the unemployment rate there was low. I suppose one could call the law “effective.” Of course, one result was a lot of underemployment as people took jobs for which they were overqualified in order to avoid the gulag.
It’s real. Then if you pass and have any to leave your heirs and they cash it out, they take some of that too.
You are worth much more ... and all the commas in the world. 8o)
Friedman and the Chicago boys set up the Chilean retirement accounts so that the government was out of it and it is everyone’s personal responsibility. The Chileans enjoy second to none retirement plans. You never see many Chileans in the US because they are doing just fine due to Pinochet and Friedman.
Thanks for the correct answer. Others are all over the board.
Eric in the Ozarks wrote: “Is there a better way to shield untaxed money ?”
The best way to shield income is to maximize your contributions to your 401k and to minimize your deductions. The RMD amounts are really very small. At age 71, the RMD is approximately 3.77% rising to almost 15% at age 99. While 15% may not seem small, the purpose of the 401k is to partially fund retirement. At age 99, there’s not much retirement yet.
Personally, I will never pay a RMD penalty. I intend to spend my 401k funds. I subscribe to the adage that “If you don’t travel first class, your grand kids will.”. Too bad for them.
Our IRAs are in accounts that will automatically distribute the RMD once we turn 70-1/2 and keep doing so unless we tell them to do it differently.
fwdude wrote: “Thanks for the correct answer. Others are all over the board.”
Thank you too. This is a good article. People should pay attention to the provisions of the law. I will be subject to the RMD provisions this year so I’ve spent some time studying.
Here’s something people should pay attention to. It is as important as the penalty. From the article: “If you turned 70½ in October 2016, for example, you’ll need to make that first withdrawal by April 1, 2017. But taking advantage of the grace period is not a recommended strategy, she said. You’d still need an RMD for 2017, and double withdrawals that year could have a significant tax impact.”
Some folks think, well, I don’t want to make a withdrawal so I’ll just take advantage of this. Fine, but do so and you’ll have to make a double withdrawal in the next year and that will increase your taxable income in that year.
I’m not a financial planner but I am retired so these things are important to me.
What ain't?
You got paid for doing a job.
The Feds want their share.
Your state wants IT's 'share'.
Your county might want what it is due.
What's left you can spend.
You buy something from some business that has been 'taxed'. (Actually they just get MORE of your money for the feds, the state, and who knows what else.)
The state now might want (MIGHT?? ha ha) MORE of your taxed income so they toss in SALES TAXES.
OK; you now have food in your clutches. You take it home, eat it and darned if you don't have to get rid of the evidence, so you end up paying a SEWER tax!
Determined to lower what gets stolen from you in a myriad of little leaks; you take a road trip to a different state, to study it's tax laws and darned if you ain't taxed (non-representarily) with a Hotel/Motel tax! (Yeah; a modern version of the infamous highwaymen that used to waylay folks on the roads.
Yup; the old adage is true: nothing certain but death and taxes.
Notice taxes is plural?
At least you only have to worry about ONE death!!
Carrier needs your tax on a tax, so does the trillion dollar stimulus and Ivan’s taxpayer money for kids plan. Looks like sprint needs it more than you do also. After all what could be more important than creating or saving jobs, much needed infrastructure and children?
Not retirement age yet, but this issue was a bug in my ear for my mother, who is subject to the rule. Even though she employees the services of a retirement planner, I had her be sure that the RMD was being handled timely by the agent.
I was asking our financial advisor if he knew anyone who had skipped taking the RMD at 70 1/2...
He said the IRS levied a 50 percent penalty on the individuals who thought they could dodge the bullet.
Ping!
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