Financial advisors say is extremely important to add the following item to their client checklists for the Fall season: "make sure that clients take their required minimum distributions from qualified retirement accounts and IRAs."
Advisors say they go to all lengths to underscore the importance of making sure these distributions are made in a timely and proper way.
There is a 50% penalty on the amount not distributed as required, they point out, and clients are also subject to violation of the Internal Revenue Code.
These are strong incentives to do what it takes to check on clients' compliance, advisors stress.
The Internal Revenue Service outlines these requirements in Publication 590, Individual Retirement Arrangements. The IRS offers this as guidance in preparing 2007 tax returns (see www.irs.gov/pub/irs-pdf/p590.pdf.)
Key points in the IRS publication include:
- Differing requirements depending on whether one is an owner or beneficiary.
- RMDs are not eligible for rollovers.
- A requirement to start taking distributions annually by April 1 of the year in which you reach age 70 1/2 .
- If the first distribution is delayed until April of the year after turning 70 1/2 , then 2 distributions must be taken for that year.
- RMDs must be taken by December 31 of any year following the initial distribution.
- And, amounts taken in excess in 1 year cannot be applied in a subsequent year.
To avoid client missteps, financial advisors offered their suggestions for making sure RMDs are taken.
Starting on November 1, it becomes a priority to check and make sure that clients have taken the proper distribution from their qualified plans, according to Ramsey Bova, a certified financial planner with Money Watch Advisors, Lexington, Ky. "I make sure that clients are taking these distributions even if it means going out to the client's house," she says.
Not only does Bova check with her clients but she says she also checks to make sure that brokerage firms that send statements correctly calculate the RMD. She checks it 3 times, as a matter of fact, she says.
The trustee, custodian or issuer that held the IRA at the end of the preceding year in which the distribution is required has to report the RMD total to the client or offer to calculate it, she adds.
The report must include the date by which the distribution must be taken and must be received by January 31 of the year in which distribution must be taken or provided with a year-end statement, Bova continues. However, she adds, "I personally don't like this caveat because many people do not review their statements very carefully."
Dawn Brown, a financial planner with L.J. Altfest & Co., New York, recommends sending RMD communications to clients from about June to July. These communications should inform them of the amount of the RMD. A follow-up call should be made to ensure that the paperwork was received and that the client is aware of the amount to be withdrawn, she adds.
If the client decides to withdraw funds in the latter part of the year, then a reminder call should be made in November, Brown continues.
