Use the final months of the year for retirement account tune-ups, including automated steps that can help you avoid penalty risk.
The end of the year is a time for celebration, reflection, and new beginnings. It can also be a critical time for nuts-and-bolts retirement account maintenance, including automated steps that can help you avoid the sting of penalties.
No matter what stage of retirement planning you’re in, the final months of the year are a good time to check the beneficiaries and contact information on your retirement account and update them as needed. Does it really matter? Yes. There are some important deadlines in December, so it can be crucial that your custodian is able to reach you to resolve any problems quickly.
Chief among those deadlines is the cutoff for distributions in the current tax year which is the last business day of the year. This year, the last business day falls on Friday, December 30. When you hit 70½, your annual required minimum distribution (RMD) must be distributed from the account no later than December 30 (your very first RMD can generally be deferred until April 1 of the following year, if you prefer; this only applies to the first year). Importantly, unlike the April 18 tax filing deadline, December 30 is not a postmark deadline; the assets must be out of the account by the end of the year to avoid a potentially steep penalty. We’re talking about 50% of the RMD.
Here are a few tips to ensure there are no hiccups with your RMD:
Even if you’re not yet required to distribute from your account, the end of the year may still be significant. If you have automatic contributions coming into your IRA, for example, make sure the contributions scheduled for next year will reflect the correct tax year. Between January 1 and the tax filing date for that year, you can designate a contribution as current year or prior year. If you have standing withholding instructions for verbal distributions, for example, make sure they still match your needs. If, and only if, a Roth conversion is advisable for the current tax year, that transaction must also occur before the new year.
For employers who maintain retirement plans for their employees, the end of the year is also of note. SIMPLE IRA providers, for instance, must provide their enrolled employees with their annual notice of elections between November 2 and December 31.
Similarly, employers who maintain qualified retirement plans (such as a 401(k), money-purchase pension plan, profit-sharing plan, etc.) for their employees also need to make any desired changes to their plans before the new year. Such provisions ordinarily take effect on January 1, so if you have questions for your employer, late in the year may be the best time to ask.
Regardless of your age, whether you’re an account owner, an employer, or a participant, a quick check of your retirement account details at the end of the year could pay convenience dividends down the road. For sure, they could cut the risk of penalties.
This article is an update of the original Late-Year Retirement Checkups published on September 28, 2015.
Retirement planning isn’t a set-it-and-forget-it proposition. Your plans take thoughtful care, and the help of professionals.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
TD Ameritrade does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2020 TD Ameritrade.