By Donna Rosato
March 27, 2015

For anyone who turned 70½ last year and has an individual retirement account, April 15 isn’t the only tax deadline you need to pay attention to this time of year.

With a traditional IRA, you must begin taking money out of your account after age 70½—what’s known as a required minimum distribution (RMD). And you must take your first RMD by April 1 of the year after you turn 70½. After that, the annual RMD deadline is December 31. After years of tax-deferred growth, you’ll face income taxes on your IRA withdrawals.

Figuring out your RMD, which is based on your account balance and life expectancy, can be tricky. Your brokerage or fund company can help, or you can use these IRS worksheets to calculate your minimum withdrawal.

Failure to pull out any or enough money triggers a hefty penalty equal to 50% of the amount you should have withdrawn. Despite the penalty, a fair number of people miss the RMD deadline.

A 2010 report by the Treasury Inspector General estimated that every year as many as 250,000 IRA owners miss the deadline for their first or annual RMD, failing to take distributions totaling some $350 million. That generates potential tax penalties of $175 million.

The rules are a bit different with a 401(k). If you’re still working for the company that sponsors your plan, you can waive this distribution rule until you quit. Otherwise, RMDs apply.

“It’s becoming increasingly common for folks to stay in the workforce after traditional retirement age,” says Andrew Meadows of Ubiquity Retirement + Savings, a web-based retirement plan provider specializing in small businesses. “If you’re still working you can leave the money in your 401(k) and let compound interest continue to do its work,” says Meadows.

What’s more, with a Roth IRA you’re exempt from RMD rules. Your money can grow tax-free indefinitely.

If you are in the fortunate position of not needing the income from your IRA, you can’t skip your RMD or avoid income taxes. You may want to reinvest the money, gift it, or donate the funds to charity, though a law that allowed you to donate money directly from an IRA expired last year and has not yet been renewed. Another option is to convert some of the money to a Roth IRA. You’ll owe income taxes on the conversion, but never face RMDs again.

Whatever you do, if you or someone you know is 70-plus, don’t miss the April 1 deadline. There’s no reason to give Uncle Sam more than you owe.

 

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