Avoid 50 Percent IRS Penalties on IRA RMDs Using Annuities

Annuity Guys® — Thu, 01 Mar 2018 07:00:29 +0000

Uncle Sam wants YOU… The Internal Revenue Service (IRS) requires all traditional individual retirement account (IRA) owners to take a distribution from their account every year after they turn 70 1/2. Failure to withdraw at least the required minimum distribution (RMD) will result in a 50% penalty payable to the IRS.

So, if an IRA owner age 73 forgets to take the $5,000 minimum withdrawal from his or her IRA at 72, he or she will be assessed a penalty of…[continued below video]

Video: The Annuity Guys, Dick and Eric, discuss avoiding the 50% IRA/RMD/IRS penalty!

Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

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…$2,500. In addition, the account holder will still need to withdraw the $5,000 and pay taxes on the amount withdrawn. The particularly disturbing aspect of this penalty is the ramifications it holds for older adults who have become less cognative in their later years. The idea of a retiree being penalized for 50% for forgetting to take a distribution in a given year seems somewhat punitive considering the early withdrawal penalty is 10% prior to age 59 1/2.

RMDs are not only an issue for those over 70. If you have an inherited IRA (no matter your age), you are subject to RMDs as well and failure to take those RMDs will result in the same 50% penalty.

How Annuities Help Avoid Penalties

Many IRA/annuity owners will decide to turn on the income provision of their IRA annuity by the age of 70; and by doing so, this creates an automatic distribution that is often times sufficient enough to cover the distribution requirement for some or even all of any additional IRA accounts they may have. The IRS does not require that one takes withdrawals from each IRA account held. The IRS treats all of an individuals IRA holdings as an aggregate account balance and requires that withdrawals meet or exceed the amount needed to meet one’s RMD. This withdrawal can all come from one or multiple accounts.

Also, while it does not fully prevent the RMD requirement, the recent introduction of the longevity annuity can actually delay a portion of the RMD. A longevity annuity can be purchased using 25% of your IRA account balance or $125,000 whichever is less. The longevity annuity is designed to allow the account holder to delay receiving income from this account up to age 85; however, once the annuity payments begin, the distributions will be subject to taxation.

Here’s an article from Fox Business on what to do if you forget to take an RMD.

Missed Your IRA’s RMD Deadline? Here’s What to Do

I’m guessing that your Individual Retirement Account (IRA) has not been a top priority recently. At this time of year, most of us get so wrapped up in, well, wrapping, as well as buying, decorating, cooking, preparing, cleaning and hosting, that we barely have time to think at all!

But if you rang in the new year without paying any attention to your IRA, you may have missed an important deadline. With expensive consequences.

By law once you reach ago 70½, you are required to begin taking a minimum amount out of your traditional IRA every year. In most cases, the deadline for taking your annual Required Minimum Distribution, or RMD, is Dec.31.

The exception to this deadline, is if this year you are making your very first RMD. To be exact- and in this case it really matters- the deadline for this first withdrawal is April 1 of the year after you reach 70½.

For instance, let’s say you turned 70 in May of 2013, that means you are 70½ in November 2013. Thus, you have until April 1, 2014 to take your 2013 RMD. (1)

After your first withdrawal, each subsequent one must be completed no later than Dec. 31 of that year. If you qualify to delay taking your initial RMD until April, you will have to take two withdrawals next year- the one for 2013 and the one for 2014.

You Inherited the IRA

Now let’s say you never contributed a dime to the IRA. Instead, it belonged to your mom who left it to you when she died. Technically, it isn’t even yours. In fact, your mom is still listed as the owner and you are named the “beneficiary.”

Nonetheless, the same rule about taking a Required Minimum Distribution by Dec. 31 each year still applies. No matter how old you are (3? 23? 53? 83?), the beneficiary of an inherited IRA must begin withdrawing a certain amount no later than December 31st of the year after the IRA owner died.

So, if mom died in 2012, your first RMD must be taken by Dec. 31, 2013.

Serious Consequences & How to Avoid Them

Whether the IRA is your own or inherited, failure to withdraw an RMD by the deadline results in one of the most onerous penalties in the tax code: 50%. That’s right. If you were supposed to take out a minimum of $4,000 and- oops!- did not do so, you have the privilege of writing the IRS a check for $2,000. Plus, of course, the income tax you owe because you withdrew money from a pre-tax account.

If you made this common mistake, don’t think the IRS will never notice. It might take a while, but the agency will eventually catch up with you. That’s because IRA custodians have to report which accounts are in RMD mode.

The IRS has a lot of flexibility to waive the penalty on a missed or late RMD. For instance, you could qualify for getting the penalty waived if you were affected by a natural disaster and records were lost, or you were in the hospital. Perhaps you had a death in the family. Or, you might have received incorrect advice from a financial advisor or IRA custodian. Waivers have even been granted to individuals who were unable to take their RMD because they were in jail!

The point is, you have a much better chance of escaping the 50% penalty if you contact the IRS before they contact you.

There are some simple- but specific- steps you have to take.

Correct Your Mistake ASAP

If you missed the RMD deadline, the first thing you need to do is withdraw the required amount as quickly as possible.

The minimum you have to take out of the IRA depends on several factors, such as whether it is your account or you inherited it, your marital status, etc… In most cases, the custodian of the IRA will help you calculate the amount. If you want to figure the amount yourself, head to the IRS website , and look for the “Forms and Publications” tab. Click on this and then enter “590” in the search box.

Publication 590 covers the basic IRA rules. Scroll down to the “Life Expectancy” tables in Appendix C (starting on p.93). Find the table that applies to you. For instance, if you inherited the IRA, you will use the “Single Life Expectancy” table. Locate your age as of the year you were supposed to take the RMD. Next to this, you’ll find your “Life Expectancy.”

For instance, say you were 53 years old in 2013 and neglected to take your minimum withdrawal from the IRA your mom left you. As you can see on the chart, your life expectancy is 31.4 years.

Next, you need to know what the inherited IRA was worth at the end of the previous year, i.e. December 31, 2012. If you don’t have a copy of the year-end statement, the IRA custodian can tell you. The minimum you should have withdrawn in 2013 is calculated as follows:

IRA Value on Dec. 31 of previous year/life expectancy factor

In the above example, if Mom’s IRA was worth $50,000 at the end of 2012, your 2013 RMD was: $50,000/31.4 = $1,592.36 (Note that the penalty for missing RMD deadline in this example exceeds $780!) [Read More at Fox]

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Are you willing to work with one of our retirement and annuity advisors based on their experience and expertise as a first priority rather than being limited by a local or regional area? The good news is that technology has forever eliminated our geographical limitations and leveled the playing field for everyone! As a result of today's technological advances, all of us can now work confidently with experts in any field including personal finance. We are no longer confined by regional or local boundaries limiting our choices and ultimate success. A high quality advisor is now as close as a click or phone call away.

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When you think about it, your money is almost always in some other state with a custodian; whether invested in the market or with an annuity insurance company, the advisors competence is primarily needed when positioning your money initially. So working with a specialized expert in a financial discipline like investments or retirement planning is imperative. There are no undo buttons in retirement! Once the annuities get set up correctly, it is customary and more efficient for owners to benefit by having direct access to the issuer instead of having to go through the agent. And, of course any reputable advisor, local or national, is more than willing to assist their clients if needed after they are implemented.

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Why Searching for the Best Annuities on Your Own Can be so Frustrating...

Almost everyone nowadays turns to the internet for answers on everything - from buying new widgets to researching just about everything under the sun; and finding the best annuity is no exception! At first, it may seem that researching will be straightforward but the more time you spend researching them, the more frustrating it can be. Why is this? First of all, it does not take long to realize that gimmicks abound - such as warnings and alerts from salesmen who just want your attention so they can sell you one or the "too good to be true" claims of 8% to 14% **guaranteed interest and of course the claim that you can get the full market upside with no downside risk! If you have done any research you have heard all of these claims in advertising which are mostly half truths and not fully explained. So how can you find the best annuities on the internet? The truth is... you can't! And what is even more frustrating is all the conflicting points of view from so called experts. There are well over 6,000 different annuities - all designed for different reasons, so is it any wonder that the deck is stacked against the average researcher or do-it-yourselfer. Add to that the fact that they pay high enough commissions to attract a plethora of both good and bad agents. This does not make annuities good or bad; they are simply a financial tool that truly benefit those who use them correctly. How can you find the best annuities for your unique situation?

Use the internet cautiously;
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Watch this telling video "Avoid Annuity Gimmicks, Amateurs and Charlatans"...

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Required Minimum Distributions Archives | Annuity Guys®

Avoid 50 Percent IRS Penalties on IRA RMDs Using Annuities

Missed Your IRA’s RMD Deadline? Here’s What to Do

Using OutCome Based Planning for Your Retirement

Selecting the Best Annuity & Retirement Income Advisor

Why Searching for the Best Annuities on Your Own Can be so Frustrating...