Tax-favored retirement plans are a big part of millions of Americans' nest eggs.
Many individuals still contribute untaxed dollars to traditional IRAs. They opt for this original IRA option because their contributions also allow them to take an immediate deduction on their tax returns.
Others put money into workplace defined contribution plans. These automatic contributions are made before taxes are taken out of their paychecks. This lowers the amount of money subject to payroll withholding.
But Uncle Sam will not wait forever to collect taxes on those accounts that have been growing for decades.
These required minimum distributions, or RMDs, are a specific amount you must withdraw each year after reaching that septuagenarian milestone.
Basically, you take the fair market value of your IRA(s) as of the end of the tax year and use the appropriate IRS life expectancy table from IRS Publication 590 to figure how much to withdraw.
Most folks use Table III, Uniform Lifetime Table. The excerpt of that table there to the left shows RMD percentages that must be taken from accounts up to age 92; the table actually goes to age 115 and older.
If you need the triple-digit portion of the table, call me. I want some tips on saving enough to be taking distributions at that age!
In addition to traditional IRAs, the accounts to which the RMD percentages apply are IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs, as well as employer-sponsored retirement plans, including profit-sharing plans and 401(k), 403(b) and 457(b) plans.
Delaying first RMD: There is some leeway, however, for the first year you must take an RMD. You have until April 1 of the next year to withdraw the required amount.
That means that folks who turned 70½ last year and didn't take their RMD in 2017 must do so this week since the April Fool's Day withdrawal deadline is on Easter Sunday.
I know many of y'all are busy this week with Easter plans, either getting ready for family visits or heading out to relatives' homes. But don't overlook this required tax action. The IRS isn't fooling around here.
Costly blown deadline: If you don't make your RMD on time, either April 1 if you postponed your first required distribution and then by Dec. 31 for each subsequent year, you'll face a serious penalty.
A 50 percent tax normally applies to any required withdrawals that are not made by the April 1 deadline. That means if you ignored an RMD of, for example, $10,000 you'll face a penalty charge of $5,000.
If you're in the 12 percent tax bracket, you would have paid $1,200 tax on your $10,000 withdrawal. By not doing that, however, you ended up owing the IRS $3,800 more thanks to the penalty charge.
Note, too, that if you put off until this April your first RMD that applies to the 2017 tax year, you'll have to take two retirement plan withdrawals this year, the delayed one due this week and 2018's that is due by the end of the year.
Today's tax tip, 5 FAQs about RMDs, has more on required minimum distributions. Check it out so that you only pay the tax due on your required retirement accounts withdrawals and not a bigger penalty amount.
And the IRS and I send our best wishes for many more 70-plus happy birthdays!
You also might find these items of interest:
- When early retirement plan withdrawals are penalty free
- Not saving enough for retirement? The tax code can help
- Retirement plan 2018 amounts unaffected by new tax laws