This oversight (no matter who is to blame) will create a penalty of 50% tax on the amount of the withdrawal which should have been taken. In other words if the RMD was to have been $10,000 and only $6,000 was taken, the penalty imposed by the IRS would be $2,000. This is calculated by taking the amount which should’ve been $10,000 and the actual amount of $6,000 the difference being $4,000. The penalty is 50% of the $4,000 which is $2,000.
Common IRA Mistakes
1. Failing to take the Required Minimum Distribution.
2. Not checking beneficiaries who the current beneficiaries are.
Only the beneficiaries on record with the IRA custodian can receive the proceeds at the death of the IRA owner. They are also the only ones who can elect to have the distributions “Stretched” over many lives other than their own. This is called a “Stretch IRA”.
3. Not having separate accounts for each beneficiary.
If a separate account is not established for each beneficiary, then the payout will be based on the life expectancy of the oldest listed beneficiary. This can cause a shorter payout time period and higher taxes paid for the younger beneficiaries.
4. Beneficiaries not taking their 1st distributions by December 31st of the year following the year of the IRA owner’s death.
Beneficiaries who inherit IRA’s are required to take their first distribution by December 31st of the year following the year of the owner’s death. Failure to do so can have terrible tax implications including large penalties.
5. Not having a plan for taking the distributions planned out in advance.
In every sporting event the score at the end of the game is the most important score. In life, when you take money out of your nest egg is very critical in making sure you have enough for your lifetime. This would be the same as in any sporting event. The end of your life is the most important time to make sure you have taken care of you money to make it work for you at this stage.
6. Having too much of your nest egg at risk in the market.
There are many opinions as to how much one should have invested the market. However, one’s own “horizon of time” is what needs to be respected. When the market goes down the time it takes to recover may be longer than the time one has before the need to take income. Special attentions need to be taken to make sure you don’t have too much at risk at any one point of time.