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2016 Year-End Tax Planning Tips – Individual Tip #1

Keep track of your Required Minimum Distributions – Don’t fall prey to one of the most severe IRS tax penalties.

As most people know, in general, you must begin taking annual required minimum distributions (RMDs) from your qualified plans (unless you are still working) such as 401(k)s and 403(b)s As well as IRAs (excluding Roths) no later than April 1st of the year following the year you reached age 70 ½ and continue to do so by December 31st of each succeeding year.  To avoid any unforeseen circumstances or last minute panic, RMDs should be requested well before the December 31st due date.  Following this schedule, you will have two RMDs in year one.  There may be circumstances such as AMT, bunching of medical or miscellaneous expenses, or basic tax bracket management where you do not wish to wait until April 1st to take your first RMD.  In such cases, you may take your first RMD in the year you turn 70 ½.

RMDs are taxed as ordinary income at rates up to 39.6%.  Funds withdrawn prior to age 59 ½ are also subject to a 10% penalty in addition to the regular tax.  Although distributions from qualified plans and IRA’s are not subject to the 3.8% “Net Investment Income Tax” (NIIT), they do increase modified adjusted gross income (MAGI) for purposes of the NIIT calculation.

The amount of your RMD is calculated as of December 31st of the previous year (December 31, 2015 for 2016 RMDs) by dividing the aggregate value of your account balances by the life expectancy factor based on your age as listed in the IRS Life Expectancy Tables.  Once the RMD is known, you may take it from any one or combination of accounts, enabling you to leave your best performers untouched while you raid lower yield portfolios.  Proper risk management, however, is still recommended in any decision thereon.

And that crippling tax penalty – it’s 50% of the amount that should have been withdrawn but wasn’t.  So, if your RMD computes to $20,000 and you instead take $8,000, your penalty is $6,000 (50% of the excess of $12,000).

IMPORTANT – Be sure to remember that RMDs are also required from qualified plans and IRAs that you have inherited from a family member.  This includes Roth IRAs as well.

When it comes to serving your accounting needs, no one has more experience than our team at DSJ. Call us today at 516.541.6549 or email us at to set up an appointment. We look forward to working with you!

 
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