Attention senior citizens: IRA distribution date is Dec. 31
Saturday, December 14, 2013
I'm a sucker for Christmas. The food, the movies, decorating the tree and the mantel and, of course, the songs. I look forward to them for 11 months of the year.
So if the seasonal time-honored trappings are so important to me, why does a novelty song make my holiday listening list? Because sometimes even the strictest traditionalist needs to get a little goofy.
That's why this season's third Christmas Tax Tip Tune is Grandma Got Run Over by a Reindeer.
I know, despite its upbeat tempo, it's a bit of a downer. But you can always opt instead for the animated movie inspired by the song. Grandma fares much better in that version and kids apparently find it hilarious.
Extended family Christmas celebrations: The main reason, however, that this one-hit-wonder gets attention from me now is that it's one of the few holiday songs that, for good or ill, recognizes senior citizens.
That's too bad, since grandparents are a big part of many holiday celebrations.
Personally, not a Christmas goes by that I don't think of the Santa Sacks my grandmother made everyone -- kids and parents -- each December. These cellophane bags contained a popcorn ball, a roll of Life Savers candy, a Santa mug and an orange. A red ribbon tied it together, with a candy cane sticking out top.
The package was delivered by Santa, but it was put together by Mrs. Claus. Yes, it was a traditional female kitchen-related project, but it was the 1960s when the goody bags were born so cut us some slack! At least my grandmother made sure Santa's better half was a part of the annual season of giving.
So if you've still got your grandparents around this Christmas, enjoy their company.
Tapping retirement money: And any retiree age 70½, grandparents or not, also needs to pay attention this time of year to a tax requirement.
If you're old enough and have a tax-deferred retirement savings account, you must start taking money out of the savings when you reach this particular half-birthday.
This is known as a required minimum distribution, or RMD. And RMDs must come out of traditional IRAs and IRA-based plans, such as SEPs, SARSEPs and SIMPLE IRAs, as well as out of 401(k), 403(b) and 457(b) workplace plans.
The reason is simple. You've been socking away money for your years without Uncle Sam getting his cut. Now he wants to start collecting taxes, at ordinary income tax rates, on the tax-deferred cash.
To do that, you must take money out of the retirement account. So even if you don't need it to live on, the RMD rule says you must withdraw some. The Internal Revenue Service provides life-expectancy tables to use in calculating just how much you must take out this first and future years.
Counting the six months: So when exactly is your tax-crucial half birthday? You turn 70½ on the day that is six calendar months after you blow out 70 cake candles on your big day.
Of course, being a tax code provision, there are some special considerations.
If your 70½ is before the end of the year in which you turned 70, you can push your first RMD until April 1 of the next year. But you'll also have to take a second RMD by Dec. 31 of that same year to cover your second year after turning 70½
What if that half-birthday date is Jan. 1? That would be the case if your birthday is July 1. The IRS notes in an example on its website that in this situation your first RMD will be for the year you turn 70½ and is due by April 1 of the next year.
Other, possibly tax-free, withdrawal options: If you don't need the money, you might be tempted to blow off taking the RMD. Don't.
If you don't take out the tax-required amount, you'll face a penalty of 50 percent of what should have been withdrawn.
But just because you must take some cash out of your retirement account, you don't have to spend it. You'll still owe taxes on the withdrawal, but you can put it back into a non-retirement savings vehicle.
Or you can donate your RMD and avoid any tax bill.
This choice, known as the IRA direct rollover to charity option, also has a Dec. 31 deadline and was a topic covered last week at my other tax blog.
In this case, you have your retirement account trustee deliver your appropriate RMD amount directly to a qualified charity. By doing so, you meet your RMD, but because you didn't take possession of the money, you don't owe tax on it.
Of course, you can't claim a charitable deduction for the gift. But that's not a problem for many older taxpayers. To claim a charitable donation, you must itemize and many senior filers, like the majority of taxpayers of all ages, claim the standard deduction. In fact, the standard deduction is larger for taxpayers age 65 or older.
If you're facing an RMD this year but would like to donate it instead, look into the rollover option. But do so soon. The rollover deadline is Dec. 31.
This option also expires on the last day of 2013. It's possible it could be renewed for the 2014 and future tax years as part of an extenders bill. But it's not guaranteed.
Also over at Bankrate Taxes Blog last week, I noted that the standard mileage deduction in 2014 will be a little bit smaller.
If you miss my additional tax thoughts at that personal finance website, usually on Tuesdays and Thursdays, you can always find a synopsis here on the ol' blog the following weekend.
You also might find these items of interest:
thanks for that clarification. Probably worth a follow-up of its own.
Posted by: Kay | Monday, December 16, 2013 at 05:40 PM
Regarding your comment: "In this case, you have your retirement account trustee deliver your appropriate RMD amount directly to a qualified charity. By doing so, you meet your RMD, but because you didn't take possession of the money, you don't owe tax on it." it is my understanding and experience that you have the "retirement account trustee" write the check direct to the charity, but that check can be sent to you to directly mail (or otherwise deliver it) to the charity. If the trustee sends it directly, it can cause confusion (especially with local charities) as they have no idea as to the source of the gift (which has advantages but also mean that you have no proof of the donation reaching the charity.
PS: I love love your tax and NASCAR posting.
Posted by: plus.google.com/111816893639492182728 | Monday, December 16, 2013 at 04:19 PM
I began to celebrate half-birthdays a few years ago although I’m still a long way from 70½. (One can never be sure how many birthdays he has left, so why not enjoy two per year?) Unfortunately, my half birthday falls right before the tax return filing deadline in April. My colleagues in the tax business are too busy to celebrate with me. At least I take a short break for observance alone of my half birthday before proceeding with tax preparation for my clientele. I’m planning to live long enough for this tradition to deliver a useful reminder of the year I need to begin required minimum distributions from my IRA.
Posted by: Brian Huber | Monday, December 16, 2013 at 09:01 AM