Year-End IRA Checklist: What You Need to Know

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As we approach the end of the year, it’s essential to stay on top of your retirement planning. This includes managing distributions from your Individual Retirement Account (IRA) for many individuals. If you have a traditional IRA (not a Roth), the IRS requires you to start taking Required Minimum Distributions (RMDs) after reaching a certain age. Understanding these rules can protect your hard-earned retirement savings from unnecessary penalties.

 When Do You Need to Start Taking RMDs?

IRA checklist

If you have a traditional IRA, you must start taking distributions no later than April 1 of the year after you turn 70½. These mandatory withdrawals, known as RMDs, must continue every year according to IRS guidelines. The penalty for not taking the required amount can be steep—up to 50% of what you were supposed to withdraw but didn’t.

For example, if you’re required to take out $10,000 but only take $9,000, the IRS can impose a penalty on the difference. If you miss the entire distribution, the penalty increases.

 Timing of Your First RMD

If you turned 70½ this year, you have until April 1 of next year to take your first RMD. However, if you wait until the following year to take that first distribution, you’ll have to take two RMDs in that year—one for this year and one for next. To avoid having to double up, it’s often wise to take your first RMD before December 31 of the year you turn 70½.

 How to Calculate Your RMD

Your RMD for any given year is calculated by dividing your IRA balance as of December 31 of the previous year by a factor from the Uniform Distribution Table. In rare cases, adjustments may be necessary, such as when you delay your first RMD or have an outstanding rollover.

 No Credit for Extra Withdrawals

It’s important to remember that taking out more than your required RMD in one year doesn’t reduce what you’ll need to take out in future years. Similarly, if the value of your IRA drops due to market conditions, you still have to take the required amount based on the previous year’s balance.

 Inherited IRAs and RMDs

If you inherit an IRA, you’re also required to take RMDs, regardless of your age. You must begin these distributions by December 31 of the year following the original owner’s death, or you could face penalties.

 Watch Out for Multiple Taxation at Death

If you have a large IRA or other tax-deferred investments, such as annuities, you could face multiple layers of taxation at death. Depending on the size of your estate, your IRA may be subject to estate taxes and federal income tax, plus any applicable state taxes. This can erode a significant portion of your IRA’s value, leaving your heirs with far less than you intended.

If your estate is valued at $1 million or more, consult with an estate planning attorney about strategies to reduce or eliminate the multiple taxation of your retirement assets.

 Final Thoughts

Managing your RMDs correctly is crucial to protecting your retirement savings from unnecessary taxes and penalties. If you need help with how to proceed or have a large estate, consulting with a tax or estate planning professional can help you avoid costly mistakes. Remember, good things are coming your way when you plan ahead!

Stay on top of your retirement strategy as the year draws to a close, and don’t hesitate to seek advice when needed. Your year-end IRA checklist does not have to wait. Contact us today for assistance.

From the desk of Attorney Brandon McGee

Kim Javins
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