Avoid this 50% Tax Penalty Before New Year's Eve

ajlopez30 Blogger

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A holiday shout-out to anyone who turned 70½ in 2017. It might not be a big deal to you, but it’s a big deal to Uncle Sam. The milestone means the IRS gets to start collecting income tax on retirement account assets that have been growing tax-deferred for decades (in some cases).


The taxes are produced through required minimum distributions (RMDs), a formulated amount that must be withdrawn and subjected to taxation from 401(k) and 403(b) accounts and IRAs each year.


But what about the under-70½ demographic? No need to worry about RMDs, right? Not necessarily. If you inherited tax-deferred retirement assets or annuities from someone other than a spouse in 2017, add RMDs to your to-do list this holiday season.


With a hat tip to the Transamerica Advanced Markets Group, here are the important things to know about inherited retirement accounts:


  • Non-spouse beneficiaries have three options for taking money from the inherited account: Lump-sum payment, all out in five years, and lifetime stretch distributions. Each option carries different benefits, so see which one is best for you.
  • For inherited IRAs, the first stretch distribution must be taken by December 31 following the year of the IRA owner’s death. For non-qualified deferred annuities, the grace period is 12 months from the annuity owner’s death.
  • If the owner passed away before taking his or her RMD for the year, the beneficiary is required to satisfy the final RMD.
  • The IRS has plenty of information online to help you determine the maximum stretch period allowed. Key point: The first RMD will be based on the beneficiary’s age in the year following the owner’s death.


Bottom line

RMD rules can be complicated, so we encourage you to talk with a financial professional if you have questions. We also have a more extensive RMD cheat sheet on our Knowledge Place.


We’d love to hear from anyone who has inherited a retirement account. Share your tips (or vent your frustrations) in the discussion below.


Neither Transamerica nor its agents or representatives may provide tax, investment or legal advice.  Anyone to whom this material is promoted, marketed, or recommended should consult with and rely on their own independent tax and legal advisors and financial professional regarding their particular situation and the concepts presented herein.