Retirees: Don't Miss the Deadline for Required IRA, 401(k) Distributions

Retired 401K paperworkDuring the tough times of the past several years, retirees have done everything they could to stretch their retirement accounts as far as they could go. But trying to stretch them too far will get you into trouble with the IRS.

Every year, most people who are 70½ years old or older by the end of the year have to take required minimum distributions from their traditional IRAs and 401(k) accounts. Although those who just turned 70½ in the past year have until April 1 to take their first distribution, others face a December 31 deadline. If you try to cheat -- or simply forget -- you'll get a nasty wake-up call from the IRS in the form of a big penalty: 50 percent of the distribution you should have taken.

Why So Harsh?

The big penalty serves as a reminder of how important withdrawals from retirement accounts are to the proper functioning of the tax laws. When Congress set up the rules governing IRAs and other retirement plans, it knew that savers would want to take maximum advantage of tax deferral. By requiring minimum distributions, Congress ensured that those tax advantages would eventually come to an end.

Sponsored Links
The process of calculating your required minimum distribution can be tricky. Essentially, you're required to take a fraction of your account every year, with the particular fraction based on your life expectancy as calculated by the IRS.

For instance, if the IRS tables say that you have a life expectancy of 20 years, then you'll need to withdraw 1/20 -- or 5 percent -- of your total account balance as of the end of the previous year.

Special Rules to Watch

Required minimum distributions aren't just for retirees. Although workers can sometimes defer having to take distributions from 401(k) plans if they're still employed beyond age 70½, IRAs aren't eligible for that exception even if you're still working.

Moreover, if you've inherited an IRA, you may have to take minimum distributions regardless of your age. Provisions allowing you to stretch out IRA distributions throughout your lifetime still require that you take a minimum amount each year, again based on your life expectancy.

For more on required minimum distributions, including the tables you'll need to calculate your personal amount, click here to go to the IRS website.


You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger.

The 10 Most Overlooked Tax Deductions

Don't overpay taxes by overlooking these tax deductions. See the 10 most common deductions taxpayers miss on their tax returns so you can keep more money in your pocket.

Read More

Brought to you by TurboTax.com

How to Find a Good CPA for Your Taxes

Finding a good CPA for your taxes is simple with these seven tips: 1. Ask about their specialization; 2. Verify their identification number, 3. Look up their license, 4. Consider their experience, 5. Confirm their willingness to sign, 6. Ask for advice, and 7. Determine their fees.

Read More

Brought to you by TurboTax.com

Reporting Self-Employment Business Income and Deductions

Self-employed taxpayers report their business income and expenses on Schedule C. TurboTax can help make the job easier.

Read More

Brought to you by TurboTax.com

2018 Tax Reform Impact: What You Should Know

Congress has passed the largest piece of tax reform legislation in more than three decades. The bill went into place on January 1, 2018, which means that it will affect the taxes of most taxpayers for the 2018 tax year.

Read More

Brought to you by TurboTax.com
Read Full Story
Your resource on tax filing
Tax season is here! Check out the Tax Center on AOL Finance for all the tips and tools you need to maximize your return.