Don't Mess With Taxes

A lot of us pay attention to our individual retirement accounts at this time of year. In fact, tax-filing season may be the only time that many people ever think at all about saving for the future.

With the tax return and IRA contribution deadline fast approaching, investment companies and financial institutions are frantically advertising their plans, trying to get you and me to put some cash into existing IRAs or open new ones.

If you can afford it, that's not a bad idea. You should start with your 401(k), since most employers at least match a portion of the money that workers put into these accounts. But if you've got any extra cash after that, consider opening a separate retirement account. This T. Rowe Price calculator can help you decide whether a Roth or traditional IRA works best for you.

The bottom line, as Free Money Finance points out here, is that saving as much as you can and doing so on a regular basis is the best way to ensure that you can retire when and with the lifestyle you want.

One person, however, is busy encouraging -- actually more than encouraging; he's demanding -- some account holders start taking money out of their retirement stashes. The person calling for the end, or at least the easing, of retirement thrift? Dear ol' Uncle Sam.

Nope, this is not an April Fool's joke. Tax laws insist that account holders start drawing down their traditional IRAs and, in some instances, similar tax-deferred plans such as company 401(k)s, once they hit age 70½. Monday is the deadline for these seniors to begin taking out the required minimum distribution (you'll probably see the withdrawal referred to as an RMD) of their retirement money.

Technically, the deadline is April 1 of the year after you reach the septuagenarian trigger age. But since April Fool's Day this year is a Saturday, the deadline slips to the next business day, Monday, April 3.

The extra time is good news if you've somehow overlooked the requirement. Just make sure you get the money out on Monday. If you ignore the RMD order, you could face a 50 percent excise tax on the amount you should have withdrawn.

Yes, it does seem somewhat counterintuitive for the federal government to demand seniors start reducing their retirement accounts, especially in this age of hand wringing over Americans' generally poor savings habits. But in this case, the IRS is more concerned with the country's bank balance than the continuing financial stability of its individual citizens.

You see, the IRS has been waiting many, many years to collect on these traditional accounts. Tax agents have watched quietly while earnings, and in some cases contributions themselves, sat untaxed in banks and mutual funds and various other accounts, compounding and producing even more yet-to-be-taxed money year after year after year.

By the time you head into your seventh decade, Uncle Sam's patience has run pretty low. He now wants his slice of your tax-deferred retirement pie.

He's even telling you exactly how much he wants. Using IRS-provided tables based on your age, your spouse's age if you're married and your (and your spouse's) predicted life expectancy, you'll figure just how much of your nest egg you'll have to crack each year.

This story I wrote for Bankrate provides more details on required minimum distributions. The table that will tell you how to figure the withdrawal amount that will satisfy the IRS is here. If you don't want to do the math yourself, plug in some basic personal and retirement account data into this online calculator from Janus and it will run the numbers for you.

There is one piece of good news for folks who don't really need the money they're required to withdraw. You can turn around and put it into a regular savings account. That's fine with Uncle Sam, since the funds will be in a taxable account and he'll collect on the interest it earns when you file your return next year.

If you're an older online surfer and were reminded of the need to tend to your IRA account, cool! Thanks for spending some time here on Don’t Mess With Taxes (extra thanks and e-hugs to you, Mum and Bob!).

And if you're younger and have a parent or other relative who turned 70½ last year, you might want to double check with them today to make sure they meet Monday's RMD deadline.