With over 12 million Americans having turned 70.5 in the past 5 years and Arizona claiming at least 2 cities in the top 10 with the highest percent population over 65, it is likely many people reaching 70.5 this year live right here in Arizona.
It is not often that we need to pay attention to turning a new age 6 months after the date but when it comes to taxes and turning 70 it is a different matter. Several new tax rules related to retirement accounts kick in during the year in which you reach 70.5. As a result you may have a number of special tax issues to address and not doing so could result in penalties and hassles. It is better to get educated now and avoid the potential headaches.
IRA Contributions. If you’ve been regularly contributing to a traditional IRA and you will turn 70.5 during 2015 you should NOT make a contribution this year. Doing so will result in significant penalty. Contributions to a traditional IRA in the year you become 70.5 and subsequent years are treated as excess contributions and are subject to a nondeductible 6% excise tax penalty for every year in which the excess contribution remains in the account. The penalty, which cannot exceed the value of the IRA account, is calculated on the excess contributed and on any interest it may have earned.
If you will turn 70.5 this year but have already made a contribution you can avoid the penalty by withdrawing the excess and any interest earned on the excess but you must do this by April 15 of 2016.
If you still want to contribute to an IRA but have reached 70.5 here are a couple of options that may be available. The key here is that you must have earned income.
- You can continue to make contributions to a Roth IRA, not to exceed the annual IRA contribution limits. To qualify for this option your earned income must be at least equal to the amount of the contribution
- If you are married, your spouse has not reached 70.5 and does not work or his or her earnings are minimal, then your earnings can be used to qualify your spouse for a contribution to a spousal IRA.
Required Minimum Distributions (RMD’s). On the flip side of contributions, if you have or will turn 70.5 this year you must begin taking distributions from qualified retirement plans and IRA accounts. If you want to delay taking the distribution this year you can do so but the distribution must be made by April 1 of 2016 to avoid penalty. So, if you turn 70.5 this year and you choose to delay a distribution until April 1 of 2016, just know that two distributions must be made in 2016.
It is important to note that willfully NOT taking your distribution can result in hefty penalties. The Excess Accumulation Penalty is a 50% excise tax of the amount (RMD) that should have been distributed for the year. For example, if you were supposed to take $30,000 but only take $5000 then the penalty is $12,500 ($30,000 – $5,000 = $25,000 x 50% = $12,500). The IRS generally will waive the penalty if;
- your failure to take the distribution was non-willful and;
- you have a valid reason and;
- you take the required distribution
As with most issues related to taxes there are some exceptions.
- If you participate in a qualified employer plan, generally you need to start taking required minimum distributions by April 1 of the year following the year you turn 70½. This is your required beginning date (RBD) for retirement distributions. However, if your plan includes the “still working exception,” your RBD is postponed to April 1 of the year following the year you retire.
- If the scenario above applies but you own more than 5% of the company then the Still Working Exception does not apply.
As you can see, turning 70½ can complicate your tax situation. If you need assistance with any of the issues discussed above, please give me a call.