One of the largest assets for many people is a qualified account, such as a 401(k) or an Individual Retirement Account.

When they contributed to these accounts, they got to reduce their earned income by an amount equal to the contribution. This money grows tax-deferred until it is withdrawn. Required minimum distributions are required to start by age 70½, and only one spouse is allowed to own the account. The other can be the beneficiary.

The penalty for not taking out required minimum distributions at age 70½ is 50%. That is one of the IRS’s worst penalties. For example, if you should have taken out $10,000 and did not, the penalty would be $5,000 plus the tax on the entire $10,000. The amount you are required to take out each year is determined by a uniform chart and the account balance on the last trading day of the prior year.

You can always take out more than the minimum, but not less. When you take out this money, you will pay ordinary income tax on it. Because we have a progressive income tax system, taking this money out could push you into a higher tax bracket. It also could cause your Medicare Part B and Part D premiums to increase.

If both spouses have qualified money and are over 70½, both must take their RMDs out. This is true even though they are probably filing a joint income tax return.

If you have several IRAs, you may be able to pull money out of just one or portions from all of them. This integration does not apply to different types of qualified money. For example, if both of you have an IRA and a 401(k), you would have to take money out of each. Be sure to check with your tax adviser.

The only person who might be able to make your qualified money theirs is your spouse, and it can happen only after you are deceased. You can stretch your qualified money to your spouse or, possibly, your children if structured properly. This could allow the money to grow substantially over time because your beneficiary would be required to start RMD withdrawal even before 70½. But younger individuals have lower amounts that must be taken. The inherited IRA would still enjoy tax-deferred growth.

An interesting question: Should a spouse take ownership of your qualified money or make it his or her own? The most important consideration is the age of the surviving spouse. If he or she is under 59½, that person should probably take it as a stretch and, if older, make it their own. The reason for this is there is no 10% early withdrawal penalty on a stretch.

If the surviving spouse made it his or her own and needed to withdraw money before this age, that person would have to pay the extra 10%. Hopefully, this stretch can be placed with a custodian that will allow the survivor to change it to their own after reaching 59½. This would give them more control and possibly lower RMDs because they may be younger.

This is such an important topic. We will discuss some common mistakes about qualified money that could cause you to pay more taxes than necessary.

Gary Boatman is a Monessen-based certified financial planner and the author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”

To submit columns on financial planning or investing, email Rick Shrum at rshrum@observer-reporter.com.

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