taxes

Year-End Tax Tip: Withdraw Your Required Minimum Distribution

If you're age 70½ or older, take your RMD now to avoid a big penalty.

There's still time to withdraw your required minimum distribution (RMD) from your traditional IRA, 401(k) or other retirement account (except a Roth IRA) before the end of the year…but you better hurry! If you don't take enough out of your retirement plans in 2019, you could be hit with a 50% penalty on the amount not distributed as required.

More Time Allowed?

If you turned 70½ in 2019, you actually have until April 1, 2020, to take your first RMD. (Use our handy RMD calculator to determine when you have to take your first RMD.) You don't have to wait until April 1, but it's an option.

If you're still working and don't own at least 5% of the company, you can also delay taking RMDs from your current employer's 401(k) plan until April 1 of the year after the year you retire. Again, it's your choice.

If you delay your first RMD to April 1, you'll have to take two RMDs in 2020, which could trigger unintended consequences that increase your tax bill. For example, two RMDs in one year might kick you into a higher tax bracket or affect the amount of Social Security benefits that are subject to tax. On the other hand, if you had a lot of income in 2019, it might make sense to delay your first RMD to avoid similar problems this year. It all depends on your circumstances.

Calculating Your RMD

Generally, the minimum amount you're required to withdraw in 2019 is calculated by dividing the account balance at the end of 2018 by a life expectancy factor that the IRS publishes in Publication 590-B. (We've created an easy-to-use RMD tool that computes RMDs for you.)

If you have more than one traditional IRA, you need to determine a separate RMD for each IRA, but you can add up the RMD amounts and take the total from any one or more of your IRAs. However, if you have multiple 401(k) accounts, you have to calculate and take the RMD from each plan separately. (Your 401(k) plan sponsor or administrator should calculate the RMD for you.)

Penalty Waivers

You may be able to avoid the 50% penalty tax. You can request a waiver if your failure to take the RMD is due to a reasonable error and take whatever steps are necessary to increase your distribution to the required level. To request a waiver, submit Form 5329 with a statement explaining the error and the steps you're taking make things right.

Steps to Take Now

If you haven't withdrawn the necessary funds for 2019 yet, don't delay. Contact the financial institution administering your retirement account right away and set up a distribution. Most large financial institutions allow you to set up an RMD online. Some companies will even process an RMD automatically if they don't receive a completed form or online request before the deadline (so you aren't hit with a penalty). However, at this time of year, the most important thing is that you act now!

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