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The Boomer

Attn Retirees: Don't Miss This April 1 Tax Deadline

By Casey Dowd The Boomer FOXBusiness

While Uncle Sam’s IRS tax deadline is weeks away, some seniors face an important retirement withdrawal deadline next week, and if they miss it there will be a steep price to pay.

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Anyone who turned 70½ in 2016 and holds assets in a traditional IRA or 401(K) plan must begin taking the initial required minimum distribution (RMD) by April 1 – or they will be subject to a tax penalty (equal to half the amount originally required to withdraw). Because the deadline falls on a Saturday, most must have this done by Friday (March 31) – unless you are withdrawing cash.

“The rule suggests ‘by April 1’, therefore, Fidelity recommends making sure the withdrawal is done by Friday March 31 -- since April 1 is a Saturday this year. If you need to sell any investments to have cash for a withdrawal, Fidelity recommends doing so at least three days in advance of the deadline to ensure cash is in the account to withdraw by April 1,” Maura Cassidy, vice president of retirement for Fidelity Investments, told FOX Business.

According to Fidelity data, as of December 23, 2016, 43% percent of the company’s investors eligible to take their first RMD from their IRAs in 2016 had not yet taken the full amount—and even worse, of those, 40% percent had not taken any RMD to date for the year. While those numbers are better than 2015, when 46% percent had not taken the full amount (and of those, 43% percent had not made any withdrawals), it’s clear many investors continue to leave themselves vulnerable to significant tax penalties when their withdrawals are not made in a timely fashion.

Cassidy discussed with FOX Business what you need to know about RMDs and the tax penalties for not withdrawing on time. 

Boomer:  If I own more than one IRA, is the RMD amount calculated separately?

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Cassidy:  Yes, each RMD amount is calculated separately. However, the amounts can be added together and the total can be taken from one, from a few or all. Just be sure to take that total amount from a non-Roth IRA(s).

Boomer: How much will I need to withdraw and how often will I have to make withdrawals after my first distribution?

Cassidy: You will need to have the amount calculated for your RMD each year since your year-end balance and age change each year. Your financial services firm should be able to help calculate that for you. At Fidelity, we indicate that amount every time you sign into your account at Fidelity.com and on statements you receive. If the details we have on file for you are correct (age and year-end balance) and you didn’t transfer in any amounts, rollover, or re-characterize any amounts, then that number is the amount you need to take from your account.

It’s important to note, in the first year you are required to take a distribution, the deadline is the following April 1st. For example, if you turned 70 ½ in March of 2016, you can take the distribution up to April 1st of 2017. However, for your second year and each year after the deadline is December 31st each year, including the year in which you took your first distribution by April 1st. Therefore the individual who took her first distribution by April 1st of 2017 will also have to take another distribution by December 31st of 2017.

Boomer: What are the penalties if I fail to make the withdrawal on time, or if I don’t withdraw enough?

Cassidy: The penalty is 50% of the amount not taken. So if you missed withdrawing $7,000, then you would face a possible penalty of $3,500. If you have failed to take a withdrawal and face a potential penalty, Fidelity recommends filing an appeal with the IRS explaining why the deadline was missed. This could help you avoid the penalty.

Boomer: Are RMDs taxed and if so is there any way to avoid paying taxes on my distribution?

Cassidy: RMDs are taxed at ordinary income rates. However, if you made any non-deductible contributions to your IRAs, ones you didn’t deduct on your annual tax filings and made with post-tax money then you do not have to pay income tax on those again. Fidelity recommends talking to your tax advisor if you have questions on your specific situation.

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