If you turned 70½ last year, you’ve got until April 1 to start taking money out of your retirement account — or face a stiff penalty from the Internal Revenue Service.
The withdrawals, known as Required Minimum Distributions (RMDs), must be taken from all employer-sponsored retirement plans, including tax-deferred Individual Retirement Accounts (IRAs), 401(k) plans, nonprofit 403(b) and government 457(b) accounts, profit-sharing plans and other defined contribution plans.
These retirement accounts allow contributions and investment gains to grow tax-free, with the proviso that account holders must begin taking RMDs after their 70th birthday. The IRS set the initial April 1 deadline as a grace period for retirees who didn’t make their first RMD withdrawal for 2017. They still have to take a 2018 distribution by Dec. 31, the annual deadline for all subsequent RMDs.
RMDs are based on prior year-end retirement account balances, a retiree’s age and life expectancy. Retirement plan administrators and custodians are required to report annual balance information for account holders to the IRS.
Plan administrators must also calculate or offer to calculate each account holders’ RMD. But it is the account holder’s responsibility to withdraw the correct amount, which must be recalculated every year, the IRS says.
You can determine your RMD using IRS worksheets. For example, a 70-year-old who had $350,000 in tax-deferred retirement accounts on Dec. 31, 2017, would have a 2018 RMD of $12,773.72.
If you have multiple retirement accounts, you must calculate the RMD for each, then add them together to determine an aggregate RMD. You can withdraw the funds from one account or from several, as long as they meet the total RMD, the IRS says. The money can also be taken as a lump sum or at intervals throughout the year.
For those who don’t take the RMD — or the proper amount — there’s a 50 percent penalty tax on the difference between the RMD and the amount withdrawn. For example, if you were supposed to withdraw $5,000 but did not, your penalty would be $2,500. The amount must be reported on your federal income tax return.
Over 2.4 million retirees paid RMD-related penalties in 2015, the IRS says. “It’s a hefty penalty for a tremendous number of retirees who just aren’t aware of the RMD requirements,’’ says Frank Paré, a California certified financial planner and president of the Financial Planners Association.
The IRS notifies those who don’t take an RMD or haven’t taken a large enough one by mail. If you’ve withdrawn too little due to a “reasonable” error or are taking steps to correct an insufficient RMD, you can request a penalty waiver by filing IRS Form 5329 and a statement of explanation, says IRS spokesman Raphael Tulino.
Withdrawals are not required from Roth IRA accounts until after the owner’s death because contributions were already taxed. And those still working past the age of 70½ may delay tapping their tax-deferred employer-based retirement accounts with their current employer without penalty until April 1 of the year following retirement. But those still working after 70½ need to take an RMD from traditional IRAs as well as distributions from previous employers’ 401(k) plans, the IRS says.