Monday is April Fools' Day, but it's no joke for some septuagenarians.
April 1 is the deadline for some folks age 70½ to take money out of their tax-deferred retirement accounts.
You know these savings plans: traditional IRAs, traditional workplace 401(k)s and several popular self-employment retirement plans.
Earnings in these retirement vehicles grow tax-deferred. But Uncle Sam won't wait for his cut of your nest egg forever.
So when you turn 70½, you must start taking out some of your traditional IRA et al money. These withdrawals are known as required minimum
distributions, or RMDs.
And for some who hit that half-year birthday last year,
April 1 is a crucial date.
Although RMDs are triggered once you turn
70½, you get a bit more time to make your first required withdrawal. Specifically, you
have until April 1 of the year that follows the calendar year in which you celebrated your 70½ birthday, which is six calendar months after your 70th birthday. (I must admit, however, I have no idea where to get a half-year birthday cake candle.)
If you turned 70½ last year and didn't take your first RMD by Dec. 31, then you must do so by Monday, April 1.
That also means that in this calendar
year you'll have to take two RMDs, your initial one by April 1 and then
this year's RMD by Dec. 31.
Withdrawal amounts and multiple plans: Exactly how much must you withdraw? The IRS has created a Uniform Lifetime Table
that most senior citizens use to determine their RMD amounts.
And
remember that RMDs apply to more than just traditional IRAs. In figuring
your required withdrawals you also must take into account money you
have in other tax-deferred retirement accounts, such as a workplace
401(k) or self-employed retirement plans.
You must calculate each tax-deferred plan's RMD separately. You can, however, add up all your account RMDs and take the total amount from one plan.
While you must take the money out, which is then taxed at ordinary income tax rates, you don't have to spend it if you don't need it. You can put the money into non-retirement savings or investment vehicle and let it keep earning that way.
Or if you want to roll the RMD amount directly to a qualified charity, you can meet withdrawal mandate and, because you don't take possession of the money, it won't count as taxable income.
Costly consequences: If you decide you're just not going to take your RMD, think again.
If you do not take a distribution
or you withdraw less than the required amount, you could face a tax penalty of 50 percent of the ignored RMD. That's right. You didn't take your $2,000 RMD, so now you owe the IRS a penalty of $3,000.
Finally, if you need or want more from your tax-deferred retirement plan, that's fine with the IRS. The extra withdrawals amounts, however, don't count toward your future RMDs.
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