Jerry Jones CPA
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Gary & Kathy D., Owner, WMAC, LLC

Retirees who miss this tax deadline could owe the IRS thousands

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.

 

Karla Bowsher

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