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This story has nothing to do with your 2013 tax return. But it has everything to do with an April 1 deadline for owners of traditional IRAs who turned age 70½ last year.
Once you reach that magic age, our beloved Internal Revenue Code says you must start taking mandatory annual withdrawals from your traditional IRAs — including any simplified employee pension (SEP) accounts and SIMPLE-IRAs that you may have set up as a small business owner.
These mandatory payouts are called required minimum distributions, or RMDs. If you fail to take them, you can be hit with a stiff penalty. Of course, taking RMDs also means getting stuck with the resulting extra federal income tax bills. In fact, the whole idea behind the RMD rules is to force folks who would otherwise leave their IRAs untouched to start taking taxable withdrawals. That way, the Feds get their share of your IRA money sooner rather than later.
Your first RMD must be taken by no later than April 1 of the year after the year you turn age 70½. So if you turned 70½ last year, the April 1 deadline for your initial RMD is almost upon you. Your initial RMD is actually for the 2013 tax year, even though you might not withdraw it until this year.
If you fail to withdraw at least the initial RMD amount by April 1, the IRS can sock you with a penalty equal to 50% of the shortfall (the difference between the RMD amount you should have taken out for the 2013 tax year and the amount you actually took out, if anything). That 50% penalty is one of the most punitive to be found in the Tax Code, and it is way too expensive to ignore.
Now, if you took traditional IRA withdrawals during 2013 that equaled or exceeded the amount of your initial RMD, you are blissfully unaffected by the April 1 deadline. All you have to do now is remember to take out your second RMD, for the 2014 tax year, by Dec. 31 of this year.
But if you have not yet withdrawn the full amount of your 2013 RMD, the April 1 deadline is very much for real, and you must withdraw enough between now and April 1 to satisfy the IRS. If you fail to do so, you’ll be charged the 50% penalty on the shortfall. Ouch!
The RMD amount that you must withdraw by April 1 equals the combined balance of all your traditional IRAs divided by a life-expectancy factor based on your age as of Dec. 31, 2013. Take that number and subtract any traditional IRA withdrawals you took during 2013. The remainder is what you must withdraw by April 1 to avoid the 50% penalty for failure to comply with the RMD rules. For full details on how to calculate RMDs and all the other RMD rules, see Understanding the IRA Withdrawal Rules.
Now for some good news: if you have several traditional IRAs, you need not take an RMD from each one. You can figure out your total RMD amount for the 2013 tax year and take the necessary money out of any one or more of your IRAs between now and April 1.
More good news: Roth IRAs established in your name are exempt from the RMD rules for as long as you live. So you can continue to invest the full amount of your Roth IRA balances and thereby continue to produce tax-free income for as long as you wish. That is just one more reason to love Roth IRAs.