So you worked hard your whole life and now you are ready to kick back and relax in retirement from the railroad. You put in lots of hard work and sacrifices to get to where you are. However there are obstacles that you need to be aware of that could have a significant impact on your financial life going forward. All three obstacles described in this article are surmountable but you need to be alert and diligent.
Required Minimum Distributions (RMDs)
A required minimum distribution is the amount that owners of a traditional IRA account and qualified plan participants(401ks) must begin withdrawing from their retirement accounts by April 1 following the year they reach age 70 1/2. The retiree must then withdraw the RMD amount each subsequent year based on the current RMD calculation.
Railroaders must meet the deadline for taking their required minimum distributions, which kick in once you reach the age of 70 1/2. All too often, owners of these plans make a costly mistake: They either end up miscalculating their RMD, or they take it from the wrong type of account. For example they may erroneously take a distribution from the other spouse's IRA.
When an RMD is not correctly taken, any shortfall is subject to a 50% penalty. To put that in dollar figures, if you had an IRA worth $200,000 and you were 72 years old, your RMD would be approximately $7,813. If you somehow missed taking that required distribution you could owe the IRS a penalty of $3,907.
Medicare Late Enrollment Penalties
If you are receiving Railroad Retirement Annuity already then you can skip to the next section. Those receiving a Railroad Retirement annuity are automatically enrolled in Medicare Parts A and B. If you are closing in on 65 and not yet collecting a Railroad Retirement Annuity you are required to take certain steps to avoid an enrollment penalty. If you’re still working and receive coverage from your railroad, you can tell Medicare that you’re already covered under an employer-sponsored plan. This will save you from having to pay an enrollment penalty but also not require you to pay the Part B monthly benefit. In general, it’s best to stay on your employer-sponsored plan. Here are the penalties facing people who don’t sign up in the initial enrollment period, which is the first three months before you turn 65.
Medicare Part A
If you don’t enroll when you’re first eligible for Medicare, you can be subject to a late-enrollment penalty, which is added to the Medicare Part A premium. The penalty is 10% of your monthly premium, and it applies regardless of the length of the delay. You have to pay this higher premium for twice the number of years you could have had Medicare Part A but didn’t sign up for it. For example, if you waited for a year to enroll in Part A, you could pay the 10% penalty for two years.
Medicare Part B
If you don’t enroll when you’re first eligible for Medicare, you can be subject to a late-enrollment penalty, which is added to the Part B premium. You may have to pay the late-enrollment penalty for as long as you have Medicare Part B. The penalty amount could go up 10% for every 12-month period when you were eligible for Part B but didn’t enroll. For example, if you waited for three years to sign up, your penalty could be 30% of the premium. In this example, you might pay your Part B monthly premium, plus 30%, for as long as you have Part B.
Medicare Part D (Prescription Drugs)
The late-enrollment penalty for Medicare Prescription Drug Plans depends on how long you go without creditable coverage. The late-enrollment penalty is calculated by multiplying 1% of the “national base beneficiary premium” by the number of months you were eligible, but did not apply, for a Medicare Prescription Drug Plan.
Lack of Estate Planning
Well this category isn’t really a tax or penalty affecting you as you aren’t around anymore. However, the penalty on your family is enormous if you haven’t put together an estate plan. Here is a scary statistic ,more than 6 in 10 individuals haven’t taken steps to even have a “will”.
The law that governs an estate without an estate plan is called intestacy and this law will determine who gets what, who looks after your kids and even who will oversee the process of distributing your assets.
That means that if assets need to be sold to pay off existing debts, your family won’t necessarily have a say in which assets get sold. If you have antiques or family heirlooms, they might end up in auction rather than in your family’s hands.
What if you become mentally unsound? Your estate plan can also include a plan for your care. This medical document may also dictate your wishes regarding life support. No medical estate plan in place will mean that intestacy laws and the court will decide who makes medical decisions for you.
If the idea of the government making decisions for you alarms you, and you want to make sure your family is well cared for after your death, be sure to create an estate plan today. Don’t let the term “estate planning” overwhelm you. There are simple steps you can take, such as making a will and updating your beneficiaries. These will go a long way to helping settling your estate expeditiously.
Hopefully this article will navigate some of the potential pitfalls in retirement. If left unattended these taxes and penalties can really take a big bite out of your retirement nest egg. If you would like assistance with these issues and other issues as you prepare for retire then please schedule a free consultation with us. We will help you negotiate a stress free retirement.
Photo by Nick Hart
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. Highball Advisors encourages you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Highball Advisors, and all rights are reserved.