Category Archives: Retirement Planning

Penalty For Not Taking Required Minimum Distribution (RMD)

Posted on

What is so great about investing in an IRA or employer retirement plan?  Tax deferral.  You put money into the account and it grows, tax deferred, for many years.  What does “tax deferred” mean?  It means that the money is growing but you are not paying taxes on those earnings… yet.  You have heard the saying “It takes money to make money.”  The idea is that you can keep your money and use it to grow your portfolio, and later, when you take the money out of the account to use it, that is when you will pay the taxes.  You “defer” the taxes until later.

Can I defer the taxes forever?

No.  Uncle Sam thought he was being nice enough to let you defer the taxes, but he does want to get his hands on those taxes at some point.  That is why there is a Required Minimum Distribution (RMD) starting at 70.5 years of age.  Most people start taking money out before that, because they were saving their money for retirement after all.  Even if you are taking money out of your IRAs, and other qualified accounts, make sure that you are taking at least the RMD, because there is a stiff penalty if you are not taking your Required Minimum Distribution or if you are not taking as much as you are supposed to take.

Required Minimum Distribution Penalty

The penalty for not taking your Required Minimum Distribution is 50% of the amount not taken or of the shortfall.  Yes, you read that right, 50%.  It is very important to take your RMD each year.

What if I made an honest mistake?

If, after the fact, you find that you have not taken your RMD and you correct the situation.  Or you didn’t take enough, and you correct the situation, the IRS has a process for asking for the penalty to be waived, as long as it was “due to a reasonable error”, according to the IRS website.  Keep in mind that does not mean that it will be waived.  You can find information on www.irs.gov  you will be filling out Form 5329 to try to qualify for the waiver, this is an instance where you might consider consulting a tax advisor.

Required Minimum Distribution (RMD) blog post series

Required Minimum Distributions generate many questions so I am creating a series of blog posts to address these questions:

 

Employer Retirement Accounts: 2013 Contribution Limits

Posted on

An excellent way to save

What is my favorite feature of investing in your retirement plan at work?  No, it’s not the employer match, well alright it is the match, but a very close second is the fact that it is automatic!

The Elephant

Because companies are doing away with pension plans, saving for retirement can seem like an impossibly huge task.  But as the old saying goes “How do you eat an elephant? One bite at a time.”  Having a little money taken out of each paycheck and deposited automatically into an employer sponsored retirement account is taking that one bite at a time.  Eventually you will get that Retirement Elephant eaten.

Change in contribution limits

Each year the IRS announces if there are changes in the maximum contribution limits to employer plans due to cost-of-living increases.  Why is that important to you?  Because you can take bigger bites; and get that Retirement Elephant eaten sooner.  The catch is, depending on the instructions you set up for 2012, you may need to take action and contact your Human Resources department to let them know that you want to increase the amount you are investing in your retirement plan.  This is the month that HR usually wants to hear from you about these decisions, so the timing is right.

401(k), 403(b), 457, and SARSEPs

The 2013 maximum contribution limit is $17,500, an increase of $500 over 2012.  Be sure to contact your company to take advantage of the opportunity to put more money into your plan next year!  If you are 50 or turning 50 in 2013 you have the opportunity to add additional money to your employer sponsored retirement plan each year in the form of a Catch-up Contribution, the amount for 2013 is $5,500 the same amount as last year.  However, please check to make sure you are taking advantage of this opportunity; it is common for me to find that new clients are not doing this, and have often never even heard of a Catch-up Contribution.  But now you have, and you can take full advantage of it!

SIMPLE plan

The maximum contribution limit also went up for the SIMPLE, it will be $12,000 in 2013 whereas it was $11,500 in 2012.  If you are 50 or turning 50 in 2013 the Catch-up Contribution for SIMPLEs in 2013 will be unchanged at $2,500.

What to do

Check to see what you are contributing to your employer sponsored retirement plan, if you want to “put the max in” as I so often hear, make sure that you do that by adjusting the numbers for the new 2013 increases.

If you are over 50 or will turn 50 in 2013, make sure that you take advantage of the Catch-up Contribution which allows you to put additional money in the account.

If you are not “putting in the max” make sure that you are getting at least the full amount of the match from your company.  This needs to be balanced with having an emergency fund/savings account.

Once you have gotten to the point of getting all of the match, and establishing the appropriate emergency fund for your family, you need to evaluate all your goals and make sure that you deploy any extra cash among those goals in a way that fits with your priorities and values.

A hint for increasing your retirement savings – each time you get a raise, increase your retirement account contribution by one percent.  You will not even feel the loss, because it is money you didn’t even have yet.

Take action today, and you will be that much closer to retirement!

What is an RMD: Required Minimum Distribution?

Posted on

Sometimes Uncle Sam can be a really nice guy.  He lets you save money in tax deferred accounts such as IRAs, 401(k)s and the like.  You get to watch that money grow over the years, accumulating in value, while not paying any taxes on the gain.  Uncle Sam just waits patiently on the sidelines not collecting taxes on the earnings.  However, Uncle Sam isn’t going to wait forever, and that is where the Required Minimum Distribution comes in.

What is a Required Minimum Distribution (RMD)?

What if you never had to tap into your IRA?  What if you had enough money from pensions and in taxable accounts so that you could just let your IRA sit, unused forever?  Well then, Uncle Sam would never get his tax money would he?  He has been a nice guy up to this point, but he has his limits, he wants to see some tax revenue, and he has decided that when you turn 70.5 is as late as he is willing to wait to start to see it.

When– Once you turn 70.5 you will be required to take money out of your IRA.  The fact is many people will have already been taking money out of their IRA, and probably paying taxes and the earnings, but if you have not, you must at 70.5.   For more details I will be writing a blog post entitled “When do I have to take my RMD?”

How much – It is the minimum amount that Uncle Sam says you must take out of your tax deferred accounts (IRAs, 401(k)s and the like) each year.  The figure is based on the value of your tax deferred accounts on the last day of the year and calculated based on your life expectancy.  For more details on I will be writing a blog post entitled “How much will the Required Minimum Distribution (RMD) be?”

Why – So Uncle Sam can finally get his hands on the tax revenue which has been deferred all these years.

IRA money is for your retirement income

You are investing money in your IRAs and 401(k)s for a reason, to use during your retirement years.  For many families, they will be taking enough money out of their account each year to cover their living expenses anyway, more than the amount that they need to take out for the Required Minimum Distribution.  Especially as we see fewer and fewer pensions.   However, it is good to know the details because the penalty for not taking your Required Minimum Distribution (RMD) is quite steep.  It is 50% of the RMD amount that should have been taken but was not.

Required Minimum Distribution (RMD) blog post series

Required Minimum Distributions generate many questions so I am creating a series of blog posts to address these questions:

Michele Clark in the News: US News and World Report

Posted on

I was interviewed by US News and World Report recently about 401(k)s.  My thoughts appeared in an article on their website this week entitled “10 Strategies to Maximize Your 401(k) Balance.”

When Emily Brandon from US News and World Report called me I shared with her an idea for making it easier to save more in your 401(k), and we talked a bit about the new fee disclosure rules in 401(k)s and what that means for employees.  We also talked about the importance of adjusting your investment portfolio as you get closer to retirement.

If you would like to read the results of our conversation, and how she interwove it with the conversation she had with two other advisors, you can read the article here: 10 Strategies to Maximize Your 401(k) Balance.

Garrett Planning Network Retreat

Posted on

The Garrett Planning Network 12th Annual Retreat was recently held in Denver Colorado.   I am a member of the Garrett Planning Network.  It is a group of about 300 financial planners that offer financial planning on an hourly basis, each member owns their own firm.  I have written about the Garrett Planning Network before.

I attended the conference and earned continuing education credits by going to various educational programs, which I need so that I can keep my designations and licenses such as:

  • CERTIFIED FINANCIAL PLANNER
  • CHARTERED RETIREMENT PLANNING COUNSELOR
  • NAPFA Registered Financial Advisor

During the four day conference I attended various educational programs such as:

  • Factors That Have the Biggest Impact On Your Client’s Long Term Financial Plan
  • Understanding Longevity
  • Paying for College
  • Curing Social “In-Security” Part 1 and 2

Kent Smetters, PhD, the Boettner Chair Professor, at the Wharton School, at the University of Pennsylvania, and former Deputy Assistant Secretary for Economic Policy of the United States Treasury, gave the Keynote address. Dr Smetters provided comments on the impact of using one model portfolio for all of a client’s investment goals vs. individual goal-based asset-liability matching.

Throughout the year, the Garrett Planning Network, has three or four conference calls each month.  One of the most beneficial outcomes of my annual trip to this retreat , is getting together with this group in person.  They are a terrific group of professional financial planners who, like me, work with clients on an hourly basis.  We share ideas and act as a resource for each other all year, so it is so nice to get together once a year and see each other.