Many retirees who turned 70½ years old prior to the start of 2019 are up against a potentially costly tax deadline.
Folks that 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 whopping 50% tax penalty — which could translate to hundreds or thousands of dollars.
RMDs are a minimum amount of money that 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 plan for employees (SIMPLE) IRA
- Traditional 401(k)
- Roth 401(k)
Roth IRAs are not subject to RMDs during the original account owner’s lifetime, as we note in “7 Secret Perks of Individual Retirement Accounts.”
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 2019 have until April 1, 2020, to take their first RMD. If that’s you, just beware that if you postpone taking your 2019 RMD until 2020, you would end up having to take two RMDs in one year: your first one by April 1 and your second one by Dec. 31, 2020.
As a result, you’d likely owe taxes on both of those RMDs in the same year, as RMDs are generally taxable income. And that could hike your tax bill.
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%. That could easily amount to four figures.
The exact amount of an RMD you must take depends on your life expectancy and retirement account balance. The IRS offers RMD worksheets to help you determine your RMD amount.
The agency also cautions that this task is on you:
“Although the IRA custodian or retirement plan administrator may calculate the RMD, the IRA or retirement plan account owner is ultimately responsible for calculating the amount of the RMD.”
Find cheaper car insurance in just minutes
Getting a better deal on car insurance doesn't have to be hard. You can have The Zebra, an insurance comparison site compare quotes in just a few minutes and find you the best rates. Consumers save an average of $368 per year, according to the site, so if you're ready to secure your new rate, get started now.