Tax Planning 101 for individuals who’ve moved money into traditional IRAs and are older than age 70: They should familiarize themselves with the rules for mandatory withdrawals from their IRAs.
Every year, many seniors needlessly incur hefty penalties or overpay their taxes because they misunderstand the strict rules that kick in when they have to begin removing money from their tax-deferred accounts and fail to do so.
The IRS sets the year you turn age 70 1/2 as the deadline for you to take required minimum distributions (RMDs). The feds allow you some leeway for the first of your RMDs. But this is a tricky exception.
Yes, you’ve the option to postpone the reckoning until April 1 (not the usual April 15 due date for filing returns, contrary to what many seniors mistakenly believe) of the year following the year in which you attained 70 1/2. But that delay can prove costly, as you still must take your second RMD by Dec. 31 of the same year.
Aside from the exception for the first RMD, the IRS is insistent on getting its share of at least the minimum amount each year, though you can always remove funds faster than required without incurring any penalty.
Just how expensive can indifference to the calendar be? Say you reach age 70 1/2 before the close of 2017 and postpone the first RMD beyond 2018. The law empowers the IRS to exact a late-withdrawal penalty equal to a horrendous 50 percent of the difference between what should have been distributed (a set amount based on your life expectancy) and what was actually distributed.
Suppose you should withdraw $20,000 and only remove $12,000; the difference of $8,000 is subject to a 50 percent penalty of $4,000. Completely ignore the calendar and the penalty soars to $10,000.