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March 4, 2009

Year-End Tips for Owners and Beneficiaries of Retirement Accounts


by Denise Appleby CISP, CRC, CRPS, CRSP, APA

The end of the year is a busy period for investors, and sometimes, unless you make a list and check it twice, you are likely to overlook some important tasks which must be completed by the end of the year. Missing your year-end deadline may not only mean missing out on tax benefits, it could also result in IRS penalties. The following is a list of transactions that must be completed by year-end. If you have not already done so, those that apply should be added to your to-do list. 

Roth IRA Conversions

If you want to complete a Roth conversion this year, it must be done by December 31. Bear in mind that a Roth conversion is a two part transaction. Part 1 is the distribution of the assets from the traditional IRA, SEP IRA, SIMPLE IRA, qualified plan, 403(b) or 457 (b) account. Part two is the deposit of funds to your Roth IRA. Only Part 1 needs to be completed by December 31; Part two can be completed within the 60-day period. If you are completing a conversion between accounts held at the same financial institution, both transactions are usually done at the same time. However, if the accounts are held at different financial institutions- which is more likely the case if the conversion is being made from a qualified plan, 403(b) or 457(b) plan, you need to make sure that Part one is completed by December 31. 

Required Minimum Distribution Deadline

With two exceptions, you will need to take a required minimum distribution (RMD) from your retirement account by December 31 if you are at least age 70 ½ this year.  This is also required if you inherited a retirement account before January 1 of this year and will be taking life-expectancy distributions. For purposes of this rule, retirement accounts include traditional IRAs, SEP IRAs, SIMPLE IRAs, Roth IRAs, 403(b) accounts, governmental 457(b) accounts, and qualified plan accounts- such as 401(k) accounts. The two exceptions to the age 70 ½ rule are: 

  1. If you reached age 70 ½ this year, you get an automatic extension until April 1 of next year to take your RMD which is due for this year. However, if you wait until next year, you will have two RMD amounts to add to your income as you will be required to take both the postponed RMD as well as the current year’s RMD which will be due to be taken by December 31. For instance, if you reach age 70 ½ in 2014, and wait until 2015 to take your 2014 RMD, you will need to take the 2014 and 2015 RMD in 2015.
  2. If you have money in a qualified plan, 403(b) or 457(b) plan and you are still working for the employer that sponsors (provides) the retirement plan; you need not begin to take your RMDs until after you retire; providing the plan offers that deferment option and you are not a five percent owner of that business. 

If you inherited a retirement account, you are subject to the life-expectancy rule if the retirement account owner died before the required beginning date and (a) the governing document defaults to the life expectancy payment option which is the case for most documents, or (b) you elected the life-expectancy option. You are also subject to the life expectancy rule if the retirement account owner died on or after the required beginning date (RBD). See our IRA Beneficiary Options Quick Reference for more information.

If You Miss This Deadline…

If you miss the deadline to take your RMD amount, you will owe the IRS an excess accumulation penalty of 50% of the RMD shortfall. For instance, if your RMD is $10,000 and you withdraw only $2,000 by December 31, you will owe the IRS $4,000 (50% of $8,000). 

Life Expectancy Election Deadline

If a retirement account owner dies before the RBD, the life expectancy is the default option under the RMD regulations. However, while most retirement account documents default to the life expectancy option, some either do not offer it as an option, or default to the five year rule if no election is made. Where an election is required to be made, the deadline to do so is usually December 31 of the year that follows the year in which the retirement account owner died. Therefore, if the retirement account owner died last year, the deadline would be December 31 of this year. If you inherited a retirement account last year, check with the plan administrator or IRA custodian to determine the provisions that apply to the account. 

If you Inherited A Retirement Account Five Years Ago…

If you inherited a retirement account five years age and you are subject to the five year rule, you must withdraw the entire balance by December 31 of this year. Any amount remaining in the account after December 31 will be subject to the 50% excess accumulation penalty. 

If You Inherited a Qualified Plan Account Last Year and the Five Year Rule Applies

If you inherited assets under a qualified plan, 403(b) plan or a governmental 457(b) plan, and the plan only allows you to distribute the assets under the five year rule, you can avoid that limitation by rolling over those assets to an inherited IRA which permits distributions under the life-expectancy rule. However, if for example you inherited the assets last year, the rollover must be completed by December 31 of this year in order for you to benefit from the life-expectancy provision. 

Establishing Separate Accounts – Beneficiaries

If you are one of multiple beneficiaries of a retirement account which you inherited last year, you will be required to use the life expectancy of the oldest beneficiary to calculate your RMD amounts, unless separate accounting occurs by December 31 of this year. If you are not the oldest beneficiary you are at a distinct disadvantage as the RMD amounts in this case will be substantially higher than if you had been able to use your own life expectancy.  This may be a non-issue in cases where the inherited amounts are relatively small, the age differences are minor and if you had already planned to withdraw more than the RMD amount each year. However, if you are not the oldest beneficiary and you wanted to stretch out the distributions as long as possible and also wanted to withdraw the least amount possible, you must make sure your share is separately accounted for by December 31. Talk to your plan administrator or IRA custodian to determine the operational procedures that apply. To get an idea of how much of a  difference it could make if separate accounting occurs by the deadline, use the Required Minimum Distribution Planner at

Establishing a Qualified Plan

If you are a small business owner, one way to reduce your taxes is by making contributions to an employer sponsored plan that you adopt for your business. For 2014, you can shelter up to $52,000 ($57,500 if you are at least age 50 by the end of the year and the plan is a 401(k) plan). See our article on Qualified Plan Selections for Small Businesses for tips on choosing a qualified plan.

Use Your IRA to Pay Estimated Taxes

Withholding from your IRA distribution can be used to satisfy your estimated tax requirements for the year, regardless of the time of year that the withholding occurs.

If you are required to pay estimated taxes, the payments must usually be made on a quarterly basis. Failure to make the quarterly payments may result in your owing the IRS penalties for underpayment of taxes. If you miss the deadlines by which these quarterly payments must be made, you can avoid the penalty by using the withholding tax from your IRA to pay the amount. Under the IRA withholding rules, any amount withheld (regardless of the date of the withholding) is treated as if it was withheld throughout the year. Therefore, if you owe estimated taxes of $1,000 and you request to have $1,000 withheld for federal income tax from your IRA distribution in December, you will be treated as if you have met the quarterly payment requirements. See IRS Publication 505 for detailed information about estimated taxes. 

Conclusion: Make Your List and Check it Twice

This is by no means an exhaustive list. Talk to your financial planner to determine if there are other time sensitive transactions that you need to complete by the end of the year. For those which must be completed by your financial institution, be sure to submit the instructions on a timely basis as some financial institutions have cut-off periods for guaranteeing processing by year-end. If you have already submitted your instructions, check your statements or follow-up to ensure that your requests were processed accurately. Doing so will also afford you the opportunity to identify any errors and implement the relevant corrective measures before the end of the year.



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