This isn’t a cruel joke being played by IRS on unsuspecting taxpayers: Some senior citizens must take their initial distributions from qualified retirement plans and IRAs by April 1 or suffer severe tax consequences. The IRS just reminded taxpayers about their obligations in a recent press release.
The April 1 deadline applies to “required minimum distributions” (RMDs) from all employer-sponsored retirement plans, including 401(k) plans, profit-sharing plans, 403(b) plans and 457(b) plans. The RMD rules also cover traditional IRAs as well as other IRA-based plans such as SEPs, SARSEPs and SIMPLEs. However, they don’t apply to Roth IRAs.
Essentially, you must begin taking RMDs by April 1st of the year following the year in which you turn 70 1/2 years old. For instance, this provision affects someone who turned age 70 on June 1, 2017 (i.e., they turned age 70 1/2 on December 1, 2017). What’s more, you must continue RMDs in each subsequent tax year. Thus, if you wait until April 1, 2018 to take your RMD for the 2017 tax year, you must receive payouts again by December 31, 2018 for the 2018 tax year.
To avoid this double tax whammy, some forward-thinking retirees may have met their RMD obligations for the 2017 tax year before January 1, 2018.
What’s the penalty for an omission? It’s equal to a whopping 50 percent penalty of the amount that should have been withdrawn based on IRS-approved life expectancy tables. When you add on the regular tax you’ll owe, this is certainly a tax problem you want to avoid — no joke!
The RMDs due for the first time by April 1, 2018 are based on your life expectancy as of your 2017 birthday and the account balances on December 31, 2016 (the last day of the year preceding the tax year for the RMDs). The trustee reports the year-end account value to the IRA owner on Form 5498, Box 5. You can find worksheets and life expectancy tables for making this computation in the appendices to IRS Pub. 590-B.
Most taxpayers use Table III (the Uniform Lifetime table) to figure their RMDs. For example, if you turned 71 in 2017, the first required distribution would be based on a distribution period of 26.5 years. A separate table, Table II, applies to a taxpayer married to a single-beneficiary spouse who is more than 10 years younger. Both tables can be found in the appendices to Publication 590-B.
There is one key exception for senior citizens who are still working. Assuming that you’re employed by a company where you do not have a 5 percent-or-more interest, you can postpone RMDs from your qualified plans at the job until your retirement. But this “still working” exception doesn’t apply to RMDs from IRAs.
Finally, some taxpayers might take advantage of a special tax law provision allowing you to transfer up to $100,000 from an IRA directly to a qualified charitable organization without paying tax (or taking a deduction either). These distributions count as RMDs and may satisfy your annual obligations while helping out a charity at the same time.
About Ken Berry
Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a wide variety of newsletters, magazines, and other periodicals.