Retirees Who Miss This Tax Deadline Could Owe the IRS Thousands

Retirees Who Miss This Tax Deadline Could Owe the IRS Thousands
Photo by Andrey_Popov / Shutterstock.com

Many retirees who turned 70½ years old prior to the start of 2018 are up against a potentially costly tax deadline.

Folks this age who own certain types of retirement accounts generally must withdraw what the IRS calls “required minimum distributions” — or “RMDs” — by Dec. 31. If they miss this deadline, they face a 50 percent tax penalty — which could translate to hundreds or thousands of dollars.

RMDs are a minimum amount of money the IRS requires you to withdraw from most types of retirement accounts each year starting the year in which you turn 70½.

Those accounts include:

  • Traditional individual retirement account (IRA)
  • Simplified employee pension (SEP) IRA
  • Savings incentive match plans for employees (SIMPLE) IRA
  • Traditional 401(k)
  • Roth 401(k)
  • 403(b)
  • 457(b)

Roth IRAs are not subject to RMDs during the original account owner’s lifetime, as we detail in “4 Big Reasons to Make a Roth IRA Part of Your Retirement Strategy.”

RMD deadlines

The deadline for your first RMD — the one for the year in which you turn 70½ — is different. The IRS gives you a little more time to withdraw that first RMD — until April 1 of the following year.

So, folks who turned or will turn 70½ during 2018 have until April 1, 2019, to take their first RMD.

Just beware that if you postpone your 2018 RMD until 2019, it will be taxed in 2019. This means you would end up having to take two RMDs in 2019 — and pay taxes on them both in the same year, as RMDs are generally taxable income.

The IRS explains:

“The special April 1 deadline only applies to the RMD for the first year. For all subsequent years, the RMD must be made by Dec. 31. So, for example, a taxpayer who turned 70½ in 2017 (born after June 30, 1946, and before July 1, 1947) and received the first RMD (for 2017) on April 1, 2018, must still receive a second RMD (for 2018) by Dec. 31, 2018.”

In some cases, employees who are still working might also be able to wait until April 1 of the year after they retire to start taking RMDs.

If you fail to withdraw an RMD in full by any applicable deadline, however, the IRS can penalize you. The agency will tax whatever RMD amount you failed to withdraw on time at 50 percent. That could easily amount to four figures.

RMD amounts

The exact amount of an RMD depends on your life expectancy and retirement account balance.

For example, 2018 RMDs are based on your life expectancy on Dec. 31, 2018, and your account balance on Dec. 31, 2017.

The IRS advises:

“Use the online worksheets on IRS.gov or find worksheets and life expectancy tables to make this computation in the Appendices to Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs). For most taxpayers, the RMD is based on Table III (Uniform Lifetime Table) in IRS Publication 590-B.”

You can also learn more about RMDs on the IRS’ “Retirement Plan and IRA Required Minimum Distributions FAQs” webpage.

What’s your take on or experience with withdrawing RMDs? Let us know below or on Facebook.

Learn everything you need to plan your dream retirement

The Only Retirement Guide You'll Ever Need gives you the knowledge you need to retire on your own terms. Sure, you can pay a financial adviser, but this online course gives you total control to create a custom retirement plan around the things that make you happy.

You're going to get expert, personalized advice. You'll have access to the latest tools. And when it's complete, you'll be able to approach your retirement confidently and with peace of mind.

It's time to plan the best years of your life. Let's get started.

Popular Articles

10 Habits Happy People Use to Make Life Better
10 Habits Happy People Use to Make Life Better

If you want to walk through life with a smile on your face, try these habits on for size.

9 Houseplants That Remove Toxins From Your Indoor Air
9 Houseplants That Remove Toxins From Your Indoor Air

These plants may also do everything from reducing the amount of dust in your home to boosting your happiness.

Don’t Want to Owe Taxes After You Die? Avoid These 17 States
Don’t Want to Owe Taxes After You Die? Avoid These 17 States

In one state, the tax man is especially tough on the estates of those who shake off this mortal coil.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Comments