The topic is called Required Minimum Distributions. The concept is fairly simple, but the ramifications and execution are not.
When funds are left in retirement plans, the IRS can’t collect taxes. Laws were passed requiring older people to take money out of their plans annually so income taxes could be collected. Simple enough, right?
The law was passed requiring amounts to be withdrawn based on an actuarial table, rather than set percentages. Then, the start date was determined to be the year in which we turn 70½ or the year following the year we turn 70½.
My 9-year-old son could have come up with something more logical than this, but it’s the next part that really gripes me.
Let’s say Aunt Gladys has a Required Minimum Distribution (RMD) of $80,000. Aunt Gladys has been having problems with early dementia and she forgets to withdraw the money from her retirement plans in time, so she took her withdrawal a month late. Congress is very good at one thing—figuring out penalties. In the case of RMDs, they actually made it rather simple. Instead of owing interest, Aunt Gladys has a simple 50% penalty to pay. So by being a month late to move her own money from one account to another, she owes a $40,000 penalty! This is one of the heaviest penalties imposed by congressional rule.
My editorial comment is that this rule is absurd and is aimed at citizens in their weakest state. This is a penalty that should be struck from the tax code. Here’s something practical you can do for Aunt Gladys: work with her CPA to be sure she gets a reminder 45 days ahead of her birthday. Most importantly, this is another reason why all three advisors (CPA, RIA, and EPA) should be working together.