The end of 2019 is drawing close, so now is a good time to review your retirement accounts and take steps to put your financial house in order.
Experts recommend putting two action items on your to-do list.
Take your required minimum distribution: You generally have to start taking required minimum distributions or RMDs from your individual retirement account (IRA), SEP IRA, SIMPLE IRA or retirement plan account when you reach 70½.
How much you take depends on the value of your IRA and your life expectancy. According to the IRS, the RMD for each year is calculated by dividing the IRA account balance as of Dec. 31 of the prior year by the applicable distribution period or life expectancy. You can determine your distribution period or life expectancy by using the Tables in Appendix B of Publication 590B, Distributions from Individual Retirement Arrangements (IRAs).
RMD rules can be tricky, so it’s best to consult with a financial professional who can help you avoid mistakes, many of which can be costly.
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Consider a few things that might trip you up: Roth IRA owners don’t have to take RMDs, but beneficiaries who have inherited a Roth IRA do. Likewise, beneficiaries who inherited a traditional IRA – even if they are not yet 70½ – have to take RMDs. An IRA owner must calculate the RMD separately for each IRA that he or she owns but can withdraw the total amount from one or more of the IRAs. RMDs required from 401(k) and 457(b) plans have to be taken separately from each of those plan accounts. If you’re still working after age 70½, you may not have to take an RMD from your employer-sponsored 401(k) plan.
“Missing an RMD results in a 50% penalty, which is one of the biggest penalties out there when it comes to retirement accounts,” says Sarah Brenner, an IRA analyst with Ed Slott and Co. “While it is possible to get this penalty waived by later taking the RMD and filing Form 5329, the safest approach is to get the RMD out by the deadline.”
Don’t need your RMD? If you are charitably inclined and must take an RMD, you can satisfy your RMD with a qualified charitable distribution or QCD, Brenner says. “This is a direct transfer from your IRA to a charity, which is not included in income for the year,” she says.
The limit for QCDs is $100,000 annually.
Review your assets: At least once per year, review your investment policy statement (IPS). That’s a document that outlines what percent of your money should be in stocks, bonds and cash, and when you will rebalance those asset classes.
If you don’t have an IPS, you should create one – before year-end. “All investors should have an IPS,” says Robert Johnson, a finance professor at Creighton University. “And it is best to develop an IPS in a rather calm market.”
If you don’t have a plan, create one, regardless of market conditions.
If you have an IPS, check whether your asset allocation matches your stated or target mix. If it doesn’t, you’ll have to start reducing the percent invested in what, in essence, are your winners and increasing the percent invested in your losers.
Your asset allocation is supposed to reflect your time horizon, your investment objectives and your risk tolerance. Over the course of a year, it’s likely your asset allocation no longer reflects your target mix.
If you own lots of accounts earmarked for retirement – 401(k)s, IRAs, Roth IRAs and taxable accounts – reviewing your asset allocation can be an onerous and time-consuming task. That’s why reviewing it now and making the appropriate changes before year-end is prudent, especially if buying and selling assets creates taxable income.
Be sure to consult with your investment adviser and tax professional before you start rebalancing your retirement accounts.
No matter what, don’t succumb to recency bias.
“While recent market activity has been quite volatile, when reviewing an IPS, investors should not concern themselves with recent market moves or the crisis de jour,” Johnson says. “The whole point on an IPS is to guide you through changing market conditions. It should not be changed as a result of market fluctuations.”