Why You SHOULD NOT Forget to take RMDs from your IRA before the Deadline
As you go through your working life, you ideally spend decades setting aside money in a private investment account to aid in the creation of a stable safety net for your retirement. While most do not give much thought to how, when, or how much money they will remove from IRAs and other private accounts, there are required minimum distributions (RMDs) that you can and should be taking from your IRA before certain deadlines. Consider these helpful guidelines to guide you through the process.
How Much to Take?
The amount of RMDs is not a set figure that applies to everyone, but rather a figure that must be calculated first. The IRS determines the amount of RMDs by dividing the prior December 31st balance of an IRA or retirement plan by the life expectancy factor established by the IRS. Furthermore, those life expectancy tables depend upon each individual's situation, with different factors for Joint and Last Survivors, Uniform Lifetime, and Single Life Expectancy.
If you are 70 ½ years of age or older and you have not taken an RMD by December 31st, the IRS will actually hit you with a very stiff penalty for failing to do so. According to CNBC, failure to make the appropriate RMD withdrawals may lead to a 50% excise tax on the amount of money that was not distributed as required. This is a huge penalty, but there are steps you can take to avoid it.
3 Steps to Take if You Missed the Deadline
Failure to take your RMDs on time does not automatically result in the IRS excising that tax on the amount you failed to withdraw. If there is one thing the federal government is great at, it is moving at a snail's pace. Here are three steps you can take if you have missed the deadline on your RMD:
• On your very first RMD from the account, you can postpone the withdrawal until April 1st of the following year.
• Let the IRS know you missed it before they figure it out themselves. Investopedia recommends filing a Form 5329 requesting a waiver of the excise tax. There are several categories you might fall under that allow you a waiver that removes the tax.
• Lastly, you can pay the tax and responsibly report it. Those tax payments must be reported on your Form 1040.
What to do if you don't need all the Money
Even if you do not need the full amount of your RMD at the time you withdraw, it is better to take the money out and avoid the tax than leave it in the account and pay 50% tax on that amount. You have a lot of options to help make that money work for you, even if you do not directly spend it. First of all, you can reinvest in a separate taxable account to keep your interest growing. You could also consider donating the money, as some donations qualify as charitable distributions to satisfy future RMDs.
Of course, you could always just sock that cash away in an emergency savings fund or CD, or even spend it on yourself. You spent your whole life working, it is time to treat yourself in retirement with your hard-earned money. If you are confused about RMDs and timing, consult with a CPA to avoid making mistakes in the process.