Many effective financial advisors will recognize clients’ milestones, such as birthdays, by sending a personal note or card. Why not consider adding the attainment of age 70½ to this list? Reminding clients of this important milestone through a systematic process or campaign can help engage them on retirement income planning as they will need to start taking required minimum distributions (RMDs) and help them avoid serious mistakes — the IRS penalty for failing to take an RMD is 50% of the RMD amount!
Since RMDs are based on an aggregate value of all IRAs (excluding Roth IRAs), this conversation can be an effective way to identify stray IRAs and jumpstart the process of consolidating accounts for easier recordkeeping and management. In fact, according to a Dow Jones study of affluent investors, 46% of investors utilize multiple financial services firms for their investing needs (2011 Dow Jones Affluent Investor Study US Report, February 2011). Also, since RMDs are generally required at age 70½ (with some exceptions) for employer–sponsored retirement plans like 401(k)s, there may be an opportunity for further consolidation through IRA rollovers. In fact, unlike IRAs, RMDs from retirement plans have to be taken out of each account individually based on the account value. RMDs from IRAs can be distributed from one IRA as long as the amount is based on the aggregate value of all IRAs. Taking RMDs across multiple 401(k)s can be more complicated to track and execute and may lead to costly mistakes. Lastly, any discussion around RMDs for 2011 can open the door to talking about the option of directing those funds to a charity tax free instead.