Deadline looms for certain retirement investors

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At a time of year when many people are focused on gifts and holiday parties, retirement investors aged 701/2 face a looming deadline of Dec. 31 to withdraw money from company retirement plans and traditional IRAs -- or face a severe penalty.

The required minimum distribution rule was put in place to make sure that individual retirement account and 401(k) account owners who have been saving on a tax-deferred basis for many years finally begin paying their share of taxes, rather than hoarding the money indefinitely and ending up leaving a lump sum to heirs that has never been taxed.

Consequences for not making the required withdrawals can be dear -- a tax penalty that amounts to 50 percent of what should have been taken out.

"Since it is one of the highest penalties that the IRS imposes, it gives a clear indication as to how closely the government watches this requirement," said P.J. DiNuzzo, president and CEO of DiNuzzo Index Advisors in Beaver. "They have waited decades and decades in many cases to get their hands on your tax money."

He noted that someone who started a qualified retirement plan in their 20s could have retirement assets shielded from IRS taxation for more than 40 or 50 years.

The Internal Revenue Service has established a uniform lifetime table to determine what percentage of the account must be withdrawn at different ages. For example, if the IRA account balance is $100,000 and the account owner is 70 with a birthday before June 30, that person would need to withdraw $3,649.64.

Retirement account owners who are 701/2 years old and have a spouse more than 10 years younger are subject to a different required minimum distribution schedule and are usually required to withdraw less money annually.

Also, for people scheduled to make their first required distribution, the IRS will allow a delay until April the following year. That means, if someone's first minimum distribution should occur this December, he or she could postpone it until April 1, 2014. But then the individual would have to take two distributions in 2014 -- one by April 1 and one by Dec. 31.

Owners of Roth IRAs do not have to make required withdrawals. They also owe no taxes on their withdrawals because all contributions to the account already have been taxed and the interest is allowed to grow tax-free.

Chris Chaney, vice president of Fort Pitt Capital Group in Green Tree, said people often get confused when it comes to the required minimum distribution rule, thinking that IRAs are treated the same as employer-sponsored plans.

"There are some people who aggregate all their retirement accounts and make one withdrawal from an IRA thinking they covered everything," Mr. Chaney said.

He said a retirement investor who has several traditional IRA accounts can add them together and make a withdrawal from one IRA account to cover taxes for them all. But with 401(k)s and 457 plans, each requires separate distributions from each separate account.

The only employer-sponsored retirement plans that can be aggregated for required minimum distribution payments are 403b plans, which are usually offered by nonprofit organizations. Employees with 403b plans can add them all together and make a withdrawal from one account that will cover all 403b accounts they own.

Mr. Chaney said the one exception in which the IRS allows someone 701/2 to forgo taking a required minimum distribution is when they are still working for a company and are still making contributions to the company retirement plan.

"That tends to be the case with a lot of professors -- and lawyers," he said. "Professors and lawyers tend to work past age 70. They have a highly developed level of expertise and can structure their work schedule in a manner that works for them."

For more information on the Uniform Lifetime Distribution table, visit the Bankrate.com website at: www.bankrate.com/finance/money-guides/ira-minimum-distributions-table.aspx?vm=r.

Tim Grant: tgrant@post-gazette.com or 412-263-1591.


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