Most people with retirement savings in a tax-deferred account – typically a 401(k) or 403(b) account – know that sooner or later the IRS is going to want their tax money. That’s why the rules governing these accounts allow savers to deposit tax-deferred funds only up to a certain age, after which withdrawals have to begin. For millions of people, December 31st represents a looming withdrawal deadline: if you ignore it, it will be an expensive oversight.
Critical Deadline Brings Sense of Urgency
We discovered this article on the Money magazine website, and we share it with you with a certain sense of urgency, since the end of the year (as we write) is barely two weeks away. For everyone age 70 ½ and older, December 31st is the last day to take what’s called the required minimum distribution, or RMD. “This is the amount you must withdraw annually from your tax-deferred retirement accounts and pay income tax on,” Money says. “It’s the government’s way of finally collecting its share of your retirement savings, which had grown tax-free for decades.” The problem, however, is procrastination, with savers delaying until the last minute and then scrambling to meet the deadline. “As of mid-November,” the article reports, “only about half of Fidelity’s RMD-eligible IRA customers had withdrawn any amount towards their RMD for 2018, according to the company.” The longer people delay, the greater the danger that their withdrawal might not be processed in time to satisfy Uncle Sam.
What happens then, says Money magazine, is not pleasant. “The penalty for missing the deadline is steep: If your RMD doesn’t process in time, the IRS imposes a 50 percent penalty on the total amount you were required to take out, which you must pay on top of the income tax that you owe.” In other words, if your minimum required distribution was $10,000, you could be facing a bill to the IRS for all the taxes owed plus a $5,000 penalty. Ouch!
(If you need to calculate your required minimum distribution, you’ll find a simple RMD calculator here, courtesy of the Internal Revenue Service.)
Time is Running Out to Process Your RMD
As the Money magazine article explains, the December 31st deadline does not mean you have to have received and deposited your distribution check. “The IRS considers your deadline met as long as your brokerage processes the withdrawal before the New Year, even if you haven’t cashed the check by then.” This is important, experts say, because it can easily take a few working days (or sometimes longer) to complete an RMD, so the longer you wait the greater the danger of missing the deadline and incurring those ugly added fines. There is one group who may be exempt from the December 31st deadline: those making their first RMD withdrawal. “If you turned 70 ½ this year,” Money says, “then you have until April 1, 2019 to take your first distribution.” The downside of waiting until then, however, is that you would still have to take a year-end withdrawal a year from now for calendar year 2019, and those two RMD’s could combine to bump you into a higher tax bracket.
There’s another option to consider, says the article, if you are facing the need to take a required minimum distribution but you don’t have to have the money for living expenses. Your brokerage (or whoever manages your retirement account) can make a donation on your behalf of up to $100,000 of your RMD directly to your favorite qualifying charity. By donating directly from a tax-deferred account, you save on the income taxes you would have owed on the RMD and you also get to deduct your charitable donation from your taxable income for the year. (Be advised, however, that the donation has to go directly from your broker to the charity. Once you touch that withdrawal it becomes taxable.) Here at AgingOptions, we suggest you sit down with a qualified tax advisor or financial planner since there are some rules and restriction, and the new federal tax law has made this option more advantageous for many. This type of donation is called a QCD, or Qualified Charitable Distribution. (This information sheet from Fidelity explains the process and basic regulations.)
The Right Guide will Keep You on Firm Footing
Here at AgingOptions we recognize that the retirement landscape can be overwhelming. That’s why you need someone qualified to guide you through the wilderness of choices, to help you keep your feet on safe and solid ground. Our commitment to you is to be that professional guide. We help you prepare for the retirement journey by showing y0u how all the essential elements of retirement actually can fit together like well-crafted pieces of a puzzle, each supporting the other: financial planning, legal preparation, housing choices, medical protection, and family communication. These facets are joined together in a LifePlan, which becomes your road map for the exciting adventure ahead.
There’s a simple and enjoyable way to find out more about a LifePlan from AgingOptions: join Rajiv Nagaich at a free LifePlanning Seminar. Invest just a few hours of your time and you’ll come away with a fresh new perspective on the retirement process. There’s a LifePlanning Seminar coming soon to a location that’s convenient for you, so click here to visit our Upcoming Events page where you can select and sign up for the seminar of your choice. Why wait any longer? Discover retirement peace of mind with a LifePlan from AgingOptions.
(originally reported at www.time.com/money)