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Have you taken your RMD yet?
No, I'm not talking about vitamins. This RMD is the required minimum distribution for owners of individual retirement accounts and for the beneficiaries of inherited IRAs. It also applies to several other types of retirement plans, with some exceptions for people who are still working.
I bring this up because the penalty for not withdrawing the required amount from a retirement account is 50 percent of what you should have withdrawn but didn't. That is serious punishment for procrastination or forgetfulness.
IRA expert Ed Slott says that in the past, the IRS has been generous in waiving the penalty for taxpayers who submitted a written excuse. However, he says he has received reports from the field that the IRS now is making IRA rollovers and distributions a top audit priority.
Starting next year, IRA custodians such as banks and brokers will notify taxpayers they are required to take an IRA distribution. Slott said that will make it more difficult for taxpayers to claim ignorance.
The moral of the story: If you are required to take a distribution, take it. Don't wait for the IRS to ask why you didn't.
The first RMD has to be taken by April 1 of the year after the year that you turn 701/2, although you might want to take it by Dec. 31 to avoid having to pay taxes on two distributions the next year. After the first year, the annual RMD deadline is Dec. 31. The amount of the distribution is based on the year-end value of your IRA accounts divided by a life expectancy factor taken from an IRS table. You can find the tables in IRS Publication 590, which can be read online at www.irs.gov or ordered by calling toll-free 1-800-829-3676.
Note that all your IRA accounts are added together to determine your required distribution, but the actual distribution can come from any one of the accounts. If you are required to take a distribution from a qualified retirement plan, it must come from that plan. Roth IRA owners don't have to take distributions, but beneficiaries of inherited Roth IRAs other than a spouse do have to take them.
If you inherited an IRA within the past five years, you may be eligible to spread out your withdrawals by basing them on your life expectancy. See Publication 590 for more details.
Slott suggests keeping paperwork related to IRA distributions and rollovers for at least three years in case the IRS comes calling.
Q. Our daughters are the contingent beneficiaries of our life insurance policies and our IRA accounts. Will they have to pay our credit card debts, if any, at the time of our death?
Not unless you have other assets. Life insurance and IRAs are protected from the claims of creditors in Florida and many other states. Florida law also protects annuities and homestead property.
Since your daughters are contingent beneficiaries, I assume that you and your spouse are primary beneficiaries on each other's policies. When the first spouse dies and the other collects the death benefit, that money becomes part of the estate of the second spouse. Creditors can pursue claims against an estate.
Q. I have had big medical expenses this year. Can I deduct them if I itemize on my next tax returns?
That depends on just how big those expenses were. You can deduct only those medical expenses that exceed 7.5 percent of your adjusted gross income. That means if you have $50,000 in adjusted gross income, your first $3,750 in medical expenses is not deductible.
The best way to get a tax break for medical expenses is to pay them through a pretax flexible spending account sponsored by your employer. Unfortunately, that won't help if you don't have access to such an account. But if you were eligible for an account and didn't use it, be sure to sign up for one for next year. Medical expenses that are reimbursed through a flexible spending account cannot be used toward a medical expense deduction on your tax return.
- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.