For many years you saved taxes by contributing to your Individual Retirement Account (IRA) or employer-provided retirement plan. Now, it is time to retire and the IRS says, “Do you remember all of the tax savings you realized for the past 35 years? We want it back!” Perhaps this is a bit extreme but there is an Internal Revenue Code section that requires you take required minimum distributions (RMD) from your IRA or pay a 50% penalty. Ouch!
To mitigate or eliminate this penalty it is critical that you aggregate all of your IRAs to calculate the total RMD that must be distributed by December 31, 2019. Over my 32-year career as a CPA and wealth advisor I have seen many instances where this simple task was erroneously performed and clients paid significant penalties. For example, Bill (not his actual name) was approached early in his retirement years to establish several IRAs to “diversify” his portfolio. This is not a form of diversification but merely a way to create more paperwork.
After he established six IRAs, he sat back and relaxed thinking retirement is a pretty good time of life. Time passed and the year came that Bill was required to take a RMD from his IRAs. The CPA for Bill thought he had accounted for all of Bill’s IRAs when, in fact, he had overlooked two of the accounts. The total funds in the two omitted accounts were $300,000! Imagine the impact this amount of funds would have made to the RMD calculation. Bill actually owned a total of $1,000,000 in IRAs and claimed a RMD on only $700,000. Bill failed to claim $10,949 of RMD and suffered a penalty in the amount of $5,474 for simply failing to account for all of his IRAs.
How can you avoid this negative impact? When we meet with new clients we perform a review of their income tax returns as well as all of their investment statements. Many people don’t understand the types of investment accounts they own.
To mitigate all of this confusion, we look for ways to eliminate or minimize paperwork to make your record keeping much simpler. As stated earlier, more accounts does not equate to diversification.
Required minimum distributions are required from IRAs the year after the owner turns 70½ years of age. To reduce the RMD amount you may wish to consider Qualified Charitable Deductions. This is a strategy in which the trustee of the IRA will distribute the RMD, or a portion thereof, to a qualified charity. To meet the criteria for this type of distribution, the taxpayer must meet the age criteria for RMDs. The limit for the charitable deduction is not the RMD limit for the year but a statutory limit of $100,000 per taxpayer.
IRAs can be confusing. Don’t take chances with your financial future. Seek out a CPA and Certified Financial Planner practitioner that specializes in retirement and tax planning. If you own an IRA, don’t give your money to the government. You worked for it, we can help you keep it!
Jimmy J. Williams is an Investment Advisor Representative of Compass Capital Management, LLC, a Registered Investment Advisor. Cambridge and Compass Capital Management, LLC are not affiliated.