|by Robert Powell, Special to USA TODAY|
April might be the cruelest month, but December is a close second. Or at least it is if you have IRAs, 401(k)s, and the like. Why so cruel? Well, you've got to keep track of all sorts of year-end deadline dates for contributions to and distributions from your various retirement accounts.
That's no easy task. Here's a look at some of the more common mistakes that retirement account owners make at year-end, and what you can do to avoid and/or correct them.
Take your required minimum distribution (RMD) before year-end:Forgetting to take or taking less than the RMD from your retirement accounts is among the more common mistakes account owners make, says
Here's what you need to know: You must take your first required minimum distribution (RMD) from your IRA for the year in which you turn age 70½, according to the
Follow special rules for inherited IRAs: If an IRA owner died this year and did not take the RMD, it must be taken before end of year and payable to the beneficiary, and not the estate, says Portnoff.
Beneficiaries must take the RMD before
Don't forget to take your RMD if you're the owner of inherited IRA from a non-spouse. Why so? There's 50% penalty on amounts that should have come out if not taken.
What to do if this happens to you? "If RMDs were missed, take them immediately and file Form 5329 to report the penalty," says Portnoff. Enter "0" for the additional tax penalty and send the
Filing Form 5329 with a "0" starts the statute of limitations, says Portnoff. By the way, inherited IRA RMDs are based on what's called the single life table. Don't use the wrong table to calculate your RMD. In addition, you have to take RMDs from any inherited IRAs that you own.
Owning an inherited Roth IRA from a non-spouse and not taking the RMD is another common mistake. "Even though it's a tax-free distribution, if the RMD is not taken it is also 50% penalty," says Pardo.
Take your RMD from your 401(k): Don't forget to take RMDs from your 401(k) by what's called your required begin date. According to the
Aggregate your RMDs:You're likely to make RMD mistakes if you own many different types of retirement accounts, says
What to do? If you have more than one IRA and have reached your required beginning date you can aggregate your IRAs and take the RMD from any or all of them, Cotter says.
You can't however, aggregate 401(k)s. "So if you have more than one company plan, you need to take the RMD from each one," he says. "Plan RMDs must be taken from plans, IRA distributions must be taken from IRAs."
Of note, 403(b) RMDs, however, must be taken from 403(b) plans, which, like IRAs, can be aggregated, Cotter says.
Two ways to avoid RMD aggregation rules: Ask a qualified financial and/or tax adviser for help. And, if need be, set up your various retirement accounts to distribute automatically your RMDs, say, by November of each year.
Other mistakes to avoid according to Pardo and Portnoff:
-Ending the year without doing a Roth conversion from an IRA. "I believe Roth conversions are a gift of the tax code," says Pardo. Year-end is a good time to evaluate your 2014 Roth conversions if you've already done one. "If they don't want to keep them, they have until
-Forgetting, if you qualify, to set up a solo 401(k) by year end. "The 401(k) doesn't need to be funded till
-Not reviewing and, if need be, updating the beneficiary designations on all your qualified retirement plans.
-Not contributing the maximum — especially if there's a match — to your 401(k), 403(b), 457, and IRA plans before year end.
-Not contributing the maximum – if your plan provides one — to your Roth 401(k) before year end.
-Not checking the status of all you retirement accounts.
-Doing "tax preparation" for 2014 in 2014. Do tax preparation in 2014 for 2015. "I find it an oxymoron that tax preparer's call it 'tax preparation' in the early part of the year but the tax year ended and so did most of the chances to lower your taxes," says Pardo.
-Check your calendar year 72(t) payment schedules to make sure the annual amount was taken.
-Watch out for wash-sale rules that apply to IRAs. "If a stock is sold for a loss in a taxable account and, within 30 days before or after that sale, the same stock is purchased inside an IRA, then the loss is not deductible," said Portnoff.
There are plenty of tax-savvy moves you can take before year end with your retirement accounts. Here are two adviser favorites.
Use your RMD toward your estimated tax payments. Check whether enough taxes were withheld from paychecks and/or estimated payments. If not, use some or all of your RMD to pay your estimated tax bill. You can have 100% percent of your RMD withheld and the
Cotter says this is his favorite year-end planning tactic. "We have been able to avoid penalties in some of these situations by withholding as much as 100%," he says.
Consider a spousal IRA. The Defense of Marriage Act (DOMA) provides some retirement-planning opportunities for those for whom it applies. "Now filing as married for federal returns makes planning such as spousal IRAs available," says Portnoff. If you are married and file a joint tax return, you can contribute to an IRA for your spouse. Read