With 2018 rapidly coming to a close, many of us are no doubt busy finishing our holiday shopping or finalizing our New Year's Eve plans. But if you're a senior, there's one move you can't neglect in the coming week: taking your required minimum distribution.
How required minimum distributions work
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When you house your savings in a tax-advantaged retirement plan like an IRA or 401(k), the money you have in there can't just sit and enjoy that wonderful treatment forever. Rather, the Internal Revenue Service wants you to remove a portion of it each year. That portion is known as your required minimum distribution (RMD), and it's calculated based on your account balance coupled with your life expectancy. (Determining that exact amount can be tricky, but there are online guides that can help you narrow it down. Your financial adviser or accountant can do the same.)
RMDs first come into play when you turn 70 1/2. Specifically, you'll need to take your first RMD by April 1 of the year following the year in which you turn 70 1/2. This means that if you turned or will turn 70 1/2 at any point in 2018, your first RMD is due by April 1, 2019. Subsequent RMDs, however, are due by Dec. 31 of their respective calendar years, which means that if you've been on the hook for RMDs in the past and haven't taken one for 2018, now's the time to get moving. If you fail to take your RMD, the IRS will take 50% of the amount you neglect to remove from your savings. Ouch.
There is one exception: If you're housing your retirement savings in a Roth IRA, you can avoid RMDs entirely. But all other tax-advantaged retirement plans, including Roth 401(k)s, impose RMDs. The good news with a Roth 401(k) is that your RMD won't trigger taxes, since all Roth withdrawals are taken tax-free. But if you have a traditional 401(k) or any other type of IRA (traditional, SEP, or SIMPLE), your RMD will be subject to taxes like all withdrawals. Note that this isn't a penalty; it's simply a feature of non-Roth accounts.
If you've yet to take your 2018 RMD, don't wait until the very last day of the year. RMDs can take time to process, so if you wait even a few more days at this point, yours might not come through in time to count for the current calendar year. If that's the case, then you'll lose 50% of whatever amount you were supposed to withdraw.
That said, if you receive your RMD in the form of a check right before the close of the current year, you don't need to make a mad dash to the bank. As long as you have that check in hand and the money associated with it is removed from your retirement plan, you'll be considered to have fulfilled your RMD. Then again, if you're looking at a sizable check, it might be worth a quick trip to the bank, because the last thing you want to do is misplace that money in the midst of all the holiday hoopla.
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