If you're age 70 ½ or over, you have an important deadline to mind amid the season's holiday bustle: Dec. 31 is the last day to take your required minimum distributions (RMDs) from your traditional 401(k) or IRA.
This is the amount you must withdraw annually from your tax-deferred retirement accounts and pay income tax on. It's the government's way of finally collecting its share of your retirement savings, which had grown tax-free for decades. The IRS has a worksheet to help you calculate your RMD, an amount that will depend on your age and account balance.
Many people procrastinate taking care of this responsibility. As of mid-November, only about half of Fidelity's RMD-eligible IRA customers had withdrawn any amount towards their RMD for 2018, according to the company. The penalty for missing the deadline is steep: If your RMD doesn’t process in time, the IRS imposes a 50% penalty on the total amount you were required to take out, which you must pay on top of the income tax that you owe.
“It’s that time of year to take it,” says Keith Bernhardt, vice president of retirement income at Fidelity. “It’s really important to give yourself time, to get the money freed up in the account.”
The IRS considers your deadline met as long as your brokerage processes the withdrawal before the New Year, even if you haven’t cashed the check by then. Unless you have enough uninvested cash in your IRA or 401(k) to satisfy your withdrawal, it can take up to a couple days before the RMD can be processed. So don't wait until the last minute.
The only exception to the Dec. 31 deadline is for those who are taking RMDs for the first time. If you turned 70 ½ this year, then you have until, April 1, 2019 to take your first distribution. But if you wait until then, you'll have to take two RMDs next year, which could bump you into a higher tax bracket. Your second RMD will be due Dec. 31, 2019.
Consider donating the RMD
Generally speaking, charitable donations must be itemized in order for you to take advantage of the deduction. And under the new tax law, your itemized deductions must clear a higher hurdle than in the past, since the standard deduction was raised to $12,000 for individual taxpayers and $24,000 for those married filing jointly.
That likely means far fewer people will itemize their donations to non-profit organizations, experts predict. But there's another option for those who don't need their RMD to Iive on, though many retirees are unaware of it, says Ric Edelman, a financial advisor in Fairfax, Va.: you can have your brokerage send up to $100,000 of your RMD directly to charity. Not only will this qualified charitable distribution save you the income taxes you would have owed on the RMD, but you'll also get to deduct your charitable donation from your taxable income for the year.
The new tax law has made this option more attractive, says Bernhardt, since it represents a way you can receive the tax benefits of your charitable donation without itemizing your deductions.