Category: IRA

IRS Is Not Fooling Around With Retirees on April 1!

Although many retirees may not need to withdraw money from their retirement accounts (IRAs, SEP IRAs and 401(k) plans to name a few), April 1st could cost some of them as much as a “50% excise tax” if they do not take any contributions, and this is no April Fools’ Joke!

 

The Reason & Who’s Affected?

As delightful and rewarding as tax-deferred retirement saving plans like IRAs can be, there is a very important IRS Rule known as Required Minimum Distributions (RMDs) that needs to be observed or the penalties can be severe. Generally speaking, all taxpayers (there are a few exceptions we will discuss later) with these types of accounts must start taking mandatory minimum distributions from their retirement accounts once they reach the age of 70½. The importance of the April 1st deadline is that it applies to the first year after which a taxpayer turns 70½.  Going forward each taxpayer is required to take the RMDs by the end of each calendar year (we provide the IRS worksheets to calculate the required minimum amount of distribution below). There is a caveat, if you are retired and your 70th birthday was say July 1, 2018. You reached age 70½ on January 1, 2019. You do not have an RMD for 2018. You must take your first RMD (for 2019) by April 1, 2020.  Of course, for those who turned 70½ June 30th or earlier in 2018, you must observe the upcoming April 1st deadline.

Failure To Take The Required Minimum Distribution

The consequences for failing to take the Required Minimum Distributions (RMDs) can be severe, as taxpayers would be subject to pay an excise tax of up to 50% on the amount not distributed as required. The IRS is flexible regarding how you can choose to take your RMD.  For instance, if you have more than one account that is subject to the Required Minimum Distributions (RMD), you can elect to withdraw the combined RMD from one account, provided that the total minimum for all accounts is withdrawn during the calendar year in question.

RMDs

What Plans Are Subject to RMDs?

The minimum distribution rules apply to:

  • traditional IRAs
  • SEP IRAs
  • SIMPLE IRAs
  • 401(k) plans
  • 403(b) plans
  • 457(b) plans
  • profit sharing plans
  • other defined contribution plans
*  Roth IRAs do not require withdrawals until after the death of the owner.

Below you will find the IRS RMD Worksheets:

IRA Required Minimum Distribution Worksheet

(Source: https://www.irs.gov/)

 

IRA Required Minimum Distribution Worksheet (if your spouse is the sole beneficiary of IRA and he or she is more than 10 years younger)

(Source: https://www.irs.gov/)