Category: Asset Protection and Retirement Planning

IRS Is Not Fooling Around With Retirees on April 1!

Although many retirees may not need to withdraw money from their retirement accounts (IRAs, SEP IRAs and 401(k) plans to name a few), April 1st could cost some of them as much as a “50% excise tax” if they do not take any contributions, and this is no April Fools’ Joke!


The Reason & Who’s Affected?

As delightful and rewarding as tax-deferred retirement saving plans like IRAs can be, there is a very important IRS Rule known as Required Minimum Distributions (RMDs) that needs to be observed or the penalties can be severe. Generally speaking, all taxpayers (there are a few exceptions we will discuss later) with these types of accounts must start taking mandatory minimum distributions from their retirement accounts once they reach the age of 70½. The importance of the April 1st deadline is that it applies to the first year after which a taxpayer turns 70½.  Going forward each taxpayer is required to take the RMDs by the end of each calendar year (we provide the IRS worksheets to calculate the required minimum amount of distribution below). There is a caveat, if you are retired and your 70th birthday was say July 1, 2018. You reached age 70½ on January 1, 2019. You do not have an RMD for 2018. You must take your first RMD (for 2019) by April 1, 2020.  Of course, for those who turned 70½ June 30th or earlier in 2018, you must observe the upcoming April 1st deadline.

Failure To Take The Required Minimum Distribution

The consequences for failing to take the Required Minimum Distributions (RMDs) can be severe, as taxpayers would be subject to pay an excise tax of up to 50% on the amount not distributed as required. The IRS is flexible regarding how you can choose to take your RMD.  For instance, if you have more than one account that is subject to the Required Minimum Distributions (RMD), you can elect to withdraw the combined RMD from one account, provided that the total minimum for all accounts is withdrawn during the calendar year in question.


What Plans Are Subject to RMDs?

The minimum distribution rules apply to:

  • traditional IRAs
  • SEP IRAs
  • 401(k) plans
  • 403(b) plans
  • 457(b) plans
  • profit sharing plans
  • other defined contribution plans
*  Roth IRAs do not require withdrawals until after the death of the owner.

Below you will find the IRS RMD Worksheets:

IRA Required Minimum Distribution Worksheet

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IRA Required Minimum Distribution Worksheet (if your spouse is the sole beneficiary of IRA and he or she is more than 10 years younger)

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Tax Planning for Retirement: Things to Remember

Many people look forward for the day they retire. This is the time when they can relax and enjoy the fruits of their labor. But, regardless of how you want to spend your retirement, having a good tax strategy and plan for retirement is a must.

It is important to understand that there are many potential tax events that can be triggered when handling your retirement assets and financial transactions. With the help of tax experts like TaxPM you should be able to optimize your tax strategy. In any case, you should take a few things into consideration.

Asset Protection

According to many experts in this area, if you want to improve your asset protection, you will have to diversify your retirement assets. Use different vehicles like investments and insurance products to keep your assets safe. You should also think about the tax laws and regulations that may eventually affect your sources of income.

Now let’s consider some of the sources of income generated by retirees.

401 (k)

As you are probably aware, a 401 (k) represent a retirement savings plan sponsored by your employer/s. (1) With its help, you can save and invest a part of your paycheck before the removal of taxes. But, you should keep in mind that 401 (k) distributions are completely taxable. This is quite logical because the contributions were made before taxation.

Roth IRA

When it comes to Roth IRA, you should know that there are no deductions for the contributions. In other words, they act as so-called after-tax funds. People are free to withdraw contributions from the plan at any point, however depending on age there are often taxes and/or penalties applied to the transaction. In other words, Roth IRAs could be a more flexible option compared to traditional IRA.


SEP IRA is the ideal solution for self-employed persons who want to make sure that their retirement plan will get them significant income in the future. It’s also good for sole proprietors. Many people use a SEP IRA to create tax-deductible contributions for the last year. It’s possible to change the amount you contribute at any time of the year.

Traditional IRA

Traditional IRA has deductible contributions, but only from current income. (2) So, when there are withdrawals of contributions at retirement, they are taxable as any ordinary income. The same goes for the income. Generally speaking, those who belong to the lower tax bracket can expect significant, permanent tax savings with Traditional IRA. Keep in mind that the income is taxed equally no matter what kind of origin it has – interest, dividends or capital gains.

Proper tax planning for retirement depends on your income, goals, qualified plans and tax filing status. Use professional advice whenever you are making a plan like this. TaxPM is here to help you.