April 1 is distribution day for some IRAs

Leave it to the IRS to have a key tax deadline on April Fool’s Day. But for millions of older folks, it’s definitely no joke.

If you (or a friend or family member) turned 70½ last year and didn’t take out the IRS mandated amount earlier this year, then sometime today you must withdraw some money from your traditional IRA or other tax-deferred retirement account (e.g., a 401(k) or 403(b) plan).

These withdrawals are known as required minimum distributions, or RMDs. And today is the deadline day for RMDs for the country’s 70-somethings.

IRS wants your money … NOW! The reason is really pretty simple. The IRS has been waiting years as your retirement money, some of which probably was put in pre-tax, was growing and taxes weren’t being collected. Well, Uncle Sam’s patience has its limits and he decided once you became a septuagenarian, enough was enough.

The IRS even tells you just how much to take out today (and in subsequent years) via several life expectancy tables found in Appendix C of IRS Publication 590. Most people use Table III, the Uniform Lifetime table (found here).

Basically, the tables take actuarial data and calculate the minimum amount you need to withdraw each year to essentially use up your retirement money within your lifetime. Hence the name "required minimum distributions."

The IRS revised the RMD tables a few years ago to account for the fact that statistically we’re living longer. That recalculation means that retirement account holders now have to take out less, leaving more in the funds to keep earning and help pay for your Golden Years.

While you must take the specified RMD, if you need more you certainly can take out more. And if you don’t need the cash you have to withdraw, you can take your RMD and put it into some other financial instrument,such as a certificate of deposit or money market fund. That’s fine with the IRS, since the tax-deferred retirement money simply goes into a taxable savings account, and getting the taxes due on the money is all the agency is really concerned about.

While it might be tempting to ignore today’s RMD deadline, don’t. If you fail to take out the specified amount, you’ll get hit with an excess accumulation tax. This levy is 50 percent of the required distribution that you didn’t take.

Say, for example, you didn’t pull out the mandated $2,000 from your traditional IRA. The IRS would then assess a $1,000 penalty. If you’re in the 25-percent income tax bracket, that’s twice the taxes you would have paid on the RMD if you’d just taken it.

Another retirement deadline looming: If you haven’t yet put money in your IRA, either traditional or Roth, for 2007 tax purposes, you’ve still got two weeks to do so.

Some folks might find a traditional IRA will allow them a tax deduction on their 2007 returns. Others will want the future tax benefits of a Roth. Either way, if you don’t put the money into the accounts by April 15, you can’t count it toward last tax year.

Sure, contributions made April 16 and later count toward 2008. But by then you’ve wasted your 2007 opportunity, and that means you lose the chance to totally max out your retirement account.

Money Blue Book has a nice post on IRAs, contribution limits and phase-outs.

So don’t waste this year’s chance to save for retirement, especially when doing so also offers some tax benefits now or later. Social Security alone certainly isn’t going to do it for most of us.