If you are past the age of 70, you need to be familiar with the phrase “required minimum distributions.” What it means is that people over the age of 70 1/2 must withdraw a specified percentage of money out of their qualified investments, which, of course, refers to IRA, 401(k) and 403(b) accounts.
Qualified dollars are those monies that have been growing tax-deferred
since the day of their deposit. Over a period of time, that could add up
to a significant pile of cash. But when you reach 70 1/2, the free ride
is over and Uncle Sam mandates that you must begin pulling the money
out and start paying income tax on it.
Naturally, the rules are overly complex. But the penalty for
non-compliance is as easy to understand as it is hard to take: A hefty
50 percent! Because of this severe penalty, my firm and other financial
firms throughout the nation go to great lengths to make certain our
clients are in compliance.
Overall, the tax code seems like it’s becoming more complex each and
every year. In addition to the required minimum distributions, the
Affordable Care Act will soon be adding more complexity to the tax code.
It’s not just the tax code that’s becoming increasingly complex. The
entire world of investing seems to be getting more complicated with each
Meanwhile, regardless of age, investors are receiving multiple mailings
and disclosures on virtually every investment in their portfolio.
Clearly, we’ve gone from a society seeking information to a society with
an overload of information. I think it’s safe to say that trying to
keep on top of all the necessary tax and investment data is a real
So, let’s talk about simplification. First off, I think it’s an
admirable goal, and as year-end approaches along with all its attendant
statements, now is an opportune time to start simplifying your life for
By simplifying, I don’t mean to reduce or eliminate your investment
diversification. For example, if you have ten IRA’s with ten different
investment firms, you’re receiving ten reports and paying ten
administrative fees. If you’re over 70 1/2, that’s an awful lot of
calculating that needs to be done in order to make certain you’re in
compliance with Uncle Sam.
A reasonable goal in 2014, then, would be to simplify. In all
likelihood, you could consolidate those ten IRA’s into one or two. Your
custodial fees would very likely be reduced, maybe even eliminated.
With the proper custodian, you can continue to diversify among several
asset classes and, more important, dramatically reduce the volume of
reports and tax forms in the years ahead.
My experience is that, once clients get deeper and deeper into their
retirement years, they like simplified reports and minimal paperwork. A
number of our clients actually have their mandatory distributions set up
to be automatic each and every year.
That’s another smart way of keeping their investment world as simple as
possible without sacrificing the integrity of their investment
objectives. And that’s an objective for which we all should strive.
Will you be able to simplify and consolidate your financial world in
2014? I certainly hope so. But if you’re really serious about it, the
time to start planning is now.