Saturday, December 12, 2015

5036 Screwed up the MRD

Saturday, December 12, 2015

If all your friends are fat, there are no seesaws, only catapults.
 – Demetri Martin –


Lately I've been sleeping oddly.  I go to bed very early, then read in bed or do logic puzzles for an hour or two, fall asleep, then I awaken again somewhere between 2 and 5 am, read or puzzle some more, fall asleep again, and wake in the morning.  Last night I woke up about 2 am, started to read, and decided I wanted something to eat.  So I came downstairs, and while munching on crackers and peanut butter, I puttered around on the computer.  I was still mulling over why the 401K folks seemed surprised that I asked more more than the Minimum Required Distribution on the 401K, so I looked some stuff up.

Well, it turns out I had been given bad advice several months ago, when I was looking into the requirements for taking the MRD (a.k.a.RMD) from my 401K and the IRAs.  The amount one has to take depends on the account balances from 12/31 of the previous year, and a percentage from IRS tables.  I had been told by my financial advisers that I could add up the accounts, arrive at the total MRD, and then take all of it from any one of the accounts, or a bit from each, or any combination, as long as the total came out to the required minimum --- and back then I found nothing online that disputed that.  So I added it all up, and took it all from the 401K.

Surprise.  I found a very recent article that says that you cannot combine the 401K with IRAs.  You can combine several IRA balances and take money from any of them, but a 401K has to be handled separately.  You have to take the 401K's MRD only from the 401K, and you can't take any IRA MRDs from the 401K.

Crap.  If I hadn't found that, I'd have been hit with major tax penalty for not having taken any MRD from the IRAs!

So, I did that at 3 am.  I took the required amount from each of the IRAs.  The IRS will have nothing to complain about.

I'm still a bit confused about why I have to pay a 20% tax "penalty" on the "excess" over the required minimum I took from the 401K.  I thought this was my retirement account, and that I'm now old enough to be able to take as much as I want out of there whenever I want --- whatever I need to live on, right?  It likely has to do with what portion is "tax free", and anything over that is taxed as income.  But I ran the numbers, and if I were to take only the minimum every year, that account wouldn't be drained until I'm 115 years old.  I'm not likely to live that long.

BTW, there's no penalty if I take money out of the 401K and roll it over into an IRA, and then I can take all I need from the IRA whenever I need it, taxed as normal income.  No penalty.  I think.  I'll have to look into that next year.

1 comment:

Bella said...

Happy New Year! Hope you are well, it's been a while since you've updated.