Older Retirees Face Steep Tax for Not Withdrawing Savings Before 2018

Folks who are or will be 70½ or older at some point this year face a looming — and potentially costly — deadline.

If you fail to make what the Internal Revenue Service calls “required minimum distributions” — or RMDs — by Dec. 31, the IRS is likely to hit you with a 50 percent tax.

Even if age 70½ is some ways off for you, educate yourself about RMDs now. As financial planning expert Maria Bruno of Vanguard Investment Strategy Group recently noted, “The time to plan for RMDs is not when you reach age 70½ but well before that.”

What are required minimum distributions?

With tax-advantaged retirement accounts such as 401(k)s, it helps to think of what the IRS calls a “distribution” as synonymous with the word “withdrawal.”

Required minimum distributions are the minimum amount of money that you must withdraw from most types of retirement accounts after turning 70½.

The following types of accounts are subject to RMDs:

• Traditional 401(k)
• Roth 401(k)
• 403(b)
• 457(b)
• Traditional IRA
• Savings Incentive Match Plan for Employees (SIMPLE) IRA
• Simplified Employee Pension (SEP) IRA
• Salary Reduction Simplified Employee Pension Plan (SARSEP)

Roth IRAs are not subject to RMDs during the account owner’s lifetime — see “4 Big Reasons to Make a Roth IRA Part of Your Retirement Strategy.”

RMD deadlines

If you have a retirement account that is subject to RMDs, you must take your first RMD by April 1 of the year after the year during which you turn 70½. So, if you turned or will turn 70½ during 2017, you must take your first RMD by April 1, 2018.

If you turned 70½ prior to 2017, however, your RMD deadline is Dec. 31, 2017. In other words, the IRS only gives you a later deadline for that first RMD. All subsequent RMDs must be taken by Dec. 31 of each year.

If you fail to withdraw an RMD in full by the deadline that applies to you, you will be hit with a steep penalty. The IRS will tax however much money you were supposed to withdraw for the RMD at 50 percent.

I repeat: Miss your RMD deadline and the IRS will take half the retirement savings you were supposed to withdraw.

Calculating your RMD

So, what’s the exact dollar amount you must withdraw from a retirement account when RMDs apply? That depends.

The IRS has an RMD formula based primarily on the account balance and your age. It’s detailed in IRS Publication 590-B.

With employer-sponsored retirement accounts, however, the IRS says the plan sponsor or administration should calculate the RMD for you.

Whatever the amount is, note that with the exception of RMDs from Roth 401(k) accounts, the IRS considers RMDs taxable income. So, if you take an RMD this year, it will be taxed at whatever your federal income tax rate is for tax year 2017.

This is one of the advantages of Roth accounts. To learn more about the differences in how Roth and nonRoth accounts are taxed, check out “Confused by Retirement Accounts? Roth, Regular IRAs and 401(k)s Made Simple.”

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