If You Forget to do This You May Face a Big Tax Penalty
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As we are getting closer and closer to the end of the year, there are many things that we need to do. But, if we’re 70 1/2 or older, you can’t forget to make your required minimum distribution.
Required minimum distributions, or RMDs, is essentially the amount you have to withdraw from pre-tax retirement accounts every single year. And since you are moving money from a non-taxable account to a taxable account, you’ll need to record the withdrawal as taxable income.
While many people groan about filing taxes – or anything to do with taxes – many people tend to procrastinate this particular item every year. But it’s a pretty important thing to be doing for a variety of reasons. The biggest reason of those being that if you don’t take enough of it, you’ll get hit with a 50 percent tax penalty on the amount that you were supposed to take out.
That is enough to frighten most people, as data from late October revealed that roughly 50 percent of Fidelity customers who have these accounts have already taken out all the necessary amount. The only discrepancy with that data though is that it doesn’t account for other people who hold other accounts with other firms. Regardless, it’s still a substantial amount.
If you’re someone who has yet to pull the minimum amount from your RMD, it’s smarter to start sooner rather than later as the deadline is December 31. Many advisors also recommend that you give yourself a week before you intend to send it. If the market is highly volatile at the time you call, the firm might be busy with calls to satisfy your request. Giving yourself a week cushion is a good idea.
That being said you may need to prepare even more as the time to complete the RMD varies from firm to firm.
Some other tips that can help you a lot in this situation are to be mindful of your calculations, especially if you hold many investment accounts with different firms. Furthermore, if you really struggle with withdrawing on a regular basis, it is smart to set up automatic withdrawals so you can avoid the headaches of this process in the future.