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Retirement advice from experts in the business

Nov. 9, 2015, 12:53 p.m. EST

5 tips to help navigate an often treacherous RMD landscape

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By Melody Juge

About Melody

Melody A. Juge is founder of Life Income Management™, a firm specializing in retirement income planning and the transfer of family wealth.  She is currently in process of finalizing her soon to be published retirement guide series, RetirementSense™. Melody is an Investment Advisor Representative with Brokers International Financial Services, LLC - Member SIPC. Life Income Management™ and Brokers International Financial Services, LLC are separate, distinct and not affiliated companies. For a free Confidential Personal Financial Organizer and more information on Melody and her team please visit: www.lifeincomemanagement.com or contact Melody directly at: mjuge@brokersifs.com.

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Many retirees are under the impression that the calculations for determining their mandatory required minimum distributions, commonly known as RMDs, are simple and easy to do. This is not always the case. So, here are a few tips that will hopefully help you avoid some common mistakes.

First, keep in mind that the cost to you, as your amends to the IRS, for any miscalculation, which leads to not withdrawing the proper RMD from your IRA or bundle of IRAs, SEP, Simple IRA, Roth 401(k) — but not a Roth IRA, 401(k), 403(b), 457(b), profit sharing plans and any other defined contribution retirement accounts — is a whopping 50% penalty of the amount not distributed as required. The 50% penalty will also be accessed if you totally neglect to pay your RMDs. This penalty is referred to as an excise tax by the IRS and has been assigned its own document; Form 5329.

How do you determine your RMD calculations?

The rules for taking required minimum distributions are among some of the more complicated of the IRS rules and those complications often increase the probability of making a mistake, thereby creating a costly tax error, at a time of life when your finances are most vulnerable.

The calculations made to establish RMDs are taken from the prior year-end balance statements of the applicable retirement accounts using one of two IRS provided tables: the Uniform Life Table or the Joint Life Expectancy Table. Most retirement-account owners will use the Uniform Life Table.

The Joint Life Expectancy Table is used by retirement-account owners who named as their sole beneficiary, for a specific retirement account, their spouse who is more than 10 years younger than they are. This may seem straightforward enough, but in many cases, the year-end balances may be wrong and will need to be manually calculated.

How to avoid an error?

Spending your hard-earned and well-saved money on federal tax penalties is never a pleasant experience. Having this adventure during retirement, especially when you are living on a limited income, with no earned income to draw on, could potentially affect the cash flow needed to fund your living expenses.

To avoid the possibility of a mistake, which would lead to an immediate penalty to you, consider obtaining the help of a tax professional to make sure that your RMD calculations are done properly. But keep in mind; no matter which authors the calculations of your RMDs, the accuracy of the calculations are the sole responsibility of the account owner.

What if you are still working after age 70?

Generally, required minimum distributions are due no later than April 1 of the year following the year you turn age 70 ½. However, if you are still working past age 70 ½, you may qualify for delaying your RMDs until the year you actually retire.

To qualify for this possible postponement there are several conditions that must be met:

  1. You do not have more than a 5% ownership in the company that you are employed with that is sponsoring the retirement plan.

  2. You are actively still working in the company.

  3. The current employer sponsored retirement plan allows for the "still working" exception.

Any retirement plans that are with other former employers are not included. Be sure to check on the specifics that may apply to your situation here .

Do you have a pre-1987 403(b)?

Here is something worth pursuing: If you have pre-1987 retirement money sitting in a 403(b) plan, the IRS actually refers to this as "old money." (See? They do have a sense of humor after all.) You may not be required to take a RMD from those certain "old money" 403(b) accounts until the year you turn age 75. Check it out for yourself on the IRS website.

Do not commingle your RMD calculations

Be sure to segregate your retirement accounts when calculating and paying your RMDs. All your IRA accounts must be calculated separately, but the RMDs may be withdrawn from one or more of the IRA accounts. This is the same allowable procedure for 403(b)s. However, 401(k)s and 457(b)s are both calculated separately and the RMDs must be taken separately from each of the respective accounts. You will find the details of these specifications on the IRS website . Always check the IRS website.

The purpose of the 5 tips listed here is to bring to your attention and act as a reminder of your responsibility, liability and the importance of managing your RMD properly. Further details can be found on IRS website which is listed throughout this article.

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