Late-Year Retirement Checkups = Great. Automating? Even Better

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. 

Think Ahead

Here are a few tips to ensure there are no hiccups with your RMD:

• Have cash available for your distribution. Remember that it takes three days for a trade to “settle.” If you don’t liquidate enough assets to cover your RMD, you may be caught short.
• Enroll in automated distributions. Just as it sounds, this takes the burden of requesting your RMD every year out of your hands. If automated, your RMD will be calculated and distributed to you whenever you wish.
• Enroll in verbal or “on-demand” distributions. This allows you to request a distribution with a convenient phone call to your custodian.
• Request your distribution early. Even if you don’t want the transaction processed until the last day of the year, getting your request in no later than mid-December will help you avoid the crush of the crowd and give you plenty of time to resolve any unforeseen difficulties.
• Transfer assets to a taxable account. If, because of your investing prowess and/or general optimism, you prefer not to sell out of any of your positions—or if there is no longer time for your trade to settle before the deadline—you can transfer assets “in kind” (meaning the actual securities, not the cash equivalent) to a taxable account (individual, joint, trust, and so on). Please be aware: This method may make it difficult to transfer the exact amount of your RMD. Depending on the value of your investments, you may end up distributing significantly more than you have to.

Maintenance Is Good for All

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.