If you have tax-deferred retirement savings and you turned 70½ last year, April 1 of this year is a critical deadline for you.
Read more: 5 costly retirement planning mistakes
What needs to happen by April 1
If you have tax-deferred savings such as a 401(k) or IRA and you turned 70½ last year, there is one thing you must do if you haven't already -- or you'll have to pay big penalties: begin withdrawing from your retirement savings.
And what happens if you don't? You could end up losing a whopping 50% of the amount you should have withdrawn.
The confusing part is that the deadline is extended for those who are taking their first required minimum distribution, or RMD. After the first year, you must take the minimum amount by the regular date of December 31. In addition, if you're taking your first RMD by April 1 of this year, you'll also need to go ahead and take your second RMD by December 31 of this year, since technically the first RMD would have been for last year.
But, taking distributions twice in one year could bump you into a higher tax bracket, or make you subject to the Medicare high-income surcharge or cause more of your Social Security income to be taxable, so you'll want to talk to your plan administrator to figure out the best plan of action.
The IRS provides some simple age examples if you aren't sure when you should take your first RMD:
- Example 1: You are retired and your 70th birthday was June 30, 2013. You reached age 70½ on December 30, 2013. You must take your first RMD (for 2013) by April 1, 2014.
- Example 2: You are retired and your 70th birthday was July 1, 2013. You reached age 70½ on January 1, 2014. You do not have an RMD for 2013. You must take your first RMD (for 2014) by April 1, 2015.
Read more: Top 10 best (and worst) states for retirees
How to calculate your RMD
If you're not sure what your required minimum distribution is, you can use the worksheets on the IRS' website here, or talk to your 401(k) plan administrator.
In addition, since the required minimum distribution rules apply individually to each plan, withdrawing from one 401(k) plan will not meet your minimum distribution requirement for another plan. That is why it's best to talk to your plan administrator or a tax professional.
Too many older Americans face penalties
The sad fact is that nearly 250,000 retirement-age Americans do not take their RMDs each year, according to a report by the Treasury Inspector General. Thus, they endure estimated tax penalties of $175 million! And many more this year are in danger of facing a penalty.
However, this can be easily avoided by knowing when you should take your RMD. You can even automate the process through your plan administrator.
Don't get caught by the penalty and pay any more than you have to!