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Don't Miss the RMD Deadline!

By Diana Batchelor

The end of the year is approaching, and with that are many deadlines that need to be met for tax purposes. One of those deadlines is for those with Individual Retirement Accounts (IRAs) or participate in a qualified plan is to make an RMD, Required Minimum Distributions, by December 31st.  The RMD that Traditional, SEP, and Simple IRA owners and qualified plan participants must generally begin withdrawing is the minimum amount that a retirement plan account owner must withdraw annually starting with the year that he or she reaches 70½ years of age or, if later, the year in which he or she retires. However, if the retirement plan account is an IRA or the account owner is a 5% owner of the business sponsoring the retirement plan, the RMDs must begin once the account holder is age 70½, regardless of whether he or she is retired. The first year of an RMD may be pushed to April 1 of the following year; however, this practice is strongly discouraged due to the fact you then must also make the current year withdrawal by December 31st of that same year. Consequently, by making two withdrawals in one tax year, this would increase the amount of taxable income for the current year substantially. It is recommended that the RMD is withdrawn in the year the participant turns 70½ unless there are extenuating circumstances, which should be discussed with your financial advisor or tax specialist.

The amount of the required minimum distribution is determined by dividing the prior year-end fair market value of the retirement account by the applicable distribution period or life expectancy of the participant. Retirement plan participants and IRA owners are responsible for making the correct amount of RMDs from their accounts on time every year or they could face very stiff penalties for failure to take their RMD. According to the Internal Revenue Service, the penalty for failure to withdraw your RMD (whether late or for the incorrect amount) is 50% of the total amount that was NOT withdrawn. The withdrawal is considered a taxable event; therefore, it is necessary to have federal taxes withheld as well as state taxes withheld. The exception to the aforementioned issue is if you already have adequate taxes withheld from some other source, such as a pension, to accommodate the amount of tax owed on the RMD.

Should you have several IRAs at various financial institutions, it is your responsibility to ensure the RMD is calculated properly for each account and that amount is withdrawn from that respective account orthe collective amount withdrawn from at least one of those accounts of the same account t type. Note: you may not calculate the RMD for a 401k, an IRA, or any other retirement account and then withdraw the aggregate amount from one account. You must make the withdrawal according to account type.

In conclusion, the RMD deadline is one you will not want to overlook. Should you have multiple retirement accounts, each one should be calculated independently for the RMD, and the RMD withdrawal must be made for each account by December 31st. If you have not reviewed the RMD requirements and you are 70½ this year, NOW is the time to do so.

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