For millions of taxpayers, the April 15 deadline to file your 2012 return already looms large. But for a select group of retirement savers, there's a deadline coming even sooner -- and missing it could cost you a huge amount of money.
That select group includes those who have money in traditional IRAs and 401(k) accounts and who turned age 70½ during 2012.
Under what's known as the required minimum distribution or RMD rules, you have until April 1 of the following year to make your first required withdrawal. In subsequent years, you need to take money out of your account by Dec. 31 to cover that year's RMD.
What If You Don't Need the Money?
The laws governing RMDs aren't really based on need. Rather, they reflect the idea that IRAs and 401(k)s were made to encourage retirement savings rather than as a tax shelter for money to eventually go to heirs. The RMD rules make sure that retirees have to withdraw -- and include in taxable income -- part of their retirement accounts every year.
The only exception to the RMD rule governs 401(k)s. If you're still working, you don't have to take 401(k) RMDs until you retire. IRAs, though, don't have that exception, so even if you're still working, you have to take a withdrawal from your IRAs.
How Much Do You Need to Take Out?
Calculating the amount of your RMD is somewhat complicated, although the IRS provides help with worksheets and tables. The basic idea, though, is that you must take withdrawals based on your life expectancy.
So for instance, if you were still age 70 at the end of 2012, you would take your IRA balance as of the end of 2011 and then divide it by your life expectancy of 27.4 years. The resulting dollar amount would be your RMD for the 2012 tax year, which you'd need to take out by April 1.
What About Roth IRAs?
Unlike traditional IRAs, Roth IRAs aren't subject to the RMD rules. As a result, you never have to withdraw from a Roth IRA if you don't want to.
What Happens If You Don't Take Your RMD?
The penalties that the IRS imposes for failing to take a required minimum distribution are harsh. The IRS calculates how much you should have withdrawn and then charges a 50 percent excise tax as a penalty.
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