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Critical IRA deadlines loom for retirees

Waiting to take your required minimum distribution may come at a hefty price.

By MSN Money Partner Nov 30, 2012 5:00PM

This post comes from Bill Bischoff at partner site MarketWatch.


MarketWatch logoIf you own one or more traditional IRAs and will be 70 1/2 or older at year-end, you must take mandatory annual payouts from your accounts. That means getting hit with the resulting extra income taxes.


Image: Hands holding a nest with money in it © Tetra Images/Tetra images/Getty ImagesIn fact, the reason Congress dreamed up the so-called required minimum distribution (RMD) rules was to force IRA owners to pay federal income tax on IRA accumulations sooner rather than later. Keep in mind that simplified employee pension (SEP) accounts and Simple IRAs are considered traditional IRAs for purposes of the RMD rules.


Unfortunately, complying with these rules is not something you can afford to blow off. If you fail to take at least the required amount each year, the IRS can assess a 50% penalty on the shortfall (the difference between what you should have withdrawn and what you actually withdrew, if anything).


Here's the rest of what you need to know about RMDs and what to do between now and year-end.


RMD basics

Your initial RMD is for the year you turn 70 1/2. Then you must take another RMD for each subsequent year for as long as you live or as long as you have a balance in one or more traditional IRAs. The annual RMD amount equals the total of your traditional IRA balances as of Dec. 31 of the previous year divided by a life expectancy divisor from the IRS table (see IRS Publication 590, Appendix C, Table III at


The RMD amount changes every year because your IRA balance is a moving target and so is the life expectancy divisor. As you grow older, the divisors get smaller, and the RMDs become a larger proportion of your IRA balance.


In January of each year that you must take an RMD, your IRA trustee or custodian should tell you the amount. You may be able to have it distributed to you automatically in either a lump sum or in monthly or quarterly installments. But don't take anything for granted here. If you understand the RMD rules and take personal responsibility for complying with them, you won't be exposed to the 50% penalty. So please keep reading.


If you turn 70 1/2 this year

As stated earlier, your first RMD is for the year you turn 70 1/2. Thanks to a special timing rule that applies only to the initial RMD, you have two options about when to withdraw it.


Take initial RMD before year-end: You can take the initial RMD by Dec. 31 of the year you turn 70 1/2. So if you turn the magic age this year and choose this option, you should take your initial RMD by no later than Dec. 31, 2012.


Example 1: You reached age 70 1/2 earlier this year or will by year-end. For purposes of this example, assume you'll still be 70 on Dec. 31, 2012. To calculate your initial RMD, divide the combined balance of all your traditional IRAs as of Dec. 31, 2011, by 27.4, which is the life expectancy divisor for a 70-year-old, according to the IRS table. Be sure to withdraw at least that amount by Dec. 31, 2012. If you've already taken some IRA withdrawals earlier this year, they offset the amount you must withdraw by year-end.

Take initial RMD next year: The other option is to take your initial RMD by April 1 of next year (the year after the year you turn 70 1/2). However, if you choose this option, you must withdraw both your first and second RMDs next year.


Example 2: Same as in Example 1, but this time you choose to withdraw your initial RMD next year, by the April 1, 2013, deadline. To calculate that initial RMD -- which is actually for your 2012 tax year -- divide the combined balance of all your traditional IRAs as of Dec. 31, 2011, by 27.4, which is the life expectancy divisor for a 70-year-old, from the IRS table. Then you must take your second RMD -- which is for the 2013 tax year -- by no later than Dec. 31, 2013. The amount will equal your Dec. 31, 2012, IRA balance divided by 26.5, which is the life expectancy divisor for a 71-year-old, from the IRS table.


Waiting may not the the tax-smart choice 

As Example 2 demonstrates, choosing to postpone your initial RMD until next year would cause a double dip of taxable RMD income in 2013. That might be a bad idea.

  • The double dip could push you into a higher 2013 tax bracket.
  • Your 2013 tax bracket may be higher in any event due to the scheduled demise of the Bush tax cuts. If so, a double dip of RMD income next year could be taxed at higher rates than if you take a single dip this year and another single dip next year.
  • Taking a double dip of RMD income next year could also increase your exposure to the new 3.8% Medicare surtax on investment income collected by higher-income taxpayers. But if you withdraw your initial RMD this year, the surtax is not a consideration because it doesn't take effect until next year.

If you turned 70 1/2 before this year

Say you turned 70 1/2 in 2011 or earlier. Your task is simple: Just be sure to withdraw at least the RMD amount for this year by year-end.


The bottom line

The most important thing to understand here is that IRA owners who have reached 70 1/2 can't afford to simply ignore the RMD rules. The 50% penalty is too expensive, and you may need to take action by year-end to avoid it. If you hit the magic age this year, the important thing to understand is that you have a choice about whether to withdraw your initial RMD this year or next.


More on MarketWatch and MSN Money:

Dec 1, 2012 3:53AM

It's really a very dirty trick. Not only do you get taxed on the withdrawal but you get taxed again on your Social Security. We made a very serious mistake in taking our S.S. at 62. We should have withdrawn enough from our IRAs to have as much as the Social Security paid us. Then when we maxed out our Social Security we would have just about eliminated our IRAs. We would probably be getting more money but for certain we would be paying less taxes.

There is also another nasty part of the tax on Social Security & that is the massive marriage penalty on the tax. Married we are over the $12,000 figure & some of our income is counted at 85%. If we got a divorce & lived together in sin my wife would pay on NONE of her Social Security & I would pay on very little. THAT IS JUST WRONG!

Nov 30, 2012 5:57PM
For those of you fortunate enough to not need your retirement funds sooner.  The tax man cometh.
Dec 3, 2012 9:24AM
One other thing associated with taxing the crap out of granmpa: If a "fair tax" is imposed, grampa, paid an INCOME tax all his life only to be hit with an OUTGO tax when he starts to spend his savings to live out his days. Yeah....real fair. You can be sure that Washington, an institution that never saw a dollar in your account it didn't want to spend, will find lots of "FAIR" ways to get its self-important hands on every nickel possible. Don't forget...the guys who are making these shifting rules by which you must live are the guys YOU vote into office. 
Dec 1, 2012 10:45AM
As the years go along the tax folks will find more and more ways to take our retirement money which we  struggled to put aside. I sure wish there had been ROTH accounts available earlier in my working years but eventually they will tax that too..... It becomes harder and harder to plan ahead as the "rules" will surely get changed over time, my CPA is a great help in explaining what my old head cannot figure out. Lots of old folks who are less and less able to understand the rules will lose a lot to fees and penalties when they can't figure out the ever changing mumbo-jumbo, soundz about right, get more out of the old folks many who can ill afford it. Don't count on your IRA custodian etc to give you correct information about what you need to withdraw especially if you have IRA's in more than one place......  yup, Grandma pays again and again......
Nov 30, 2012 6:01PM
Dec 3, 2012 12:01PM
Good artical with real information. Now are 401k's considered the same as IRA'S? OR ARE THEY TAXED UNNDER A DIFFERENT SET OF STANDARDS? 
Dec 3, 2012 2:22PM
The US government is NOT here "for" you but "for" whatever you have managed to save.  If the trend of this government is to continue, it is my sincere wish that some country with responsible leadership take over Washington D. C. and send those clowns into exile.
Dec 3, 2012 2:12PM
I guess it pays to be stupid. It just doesn't pay the ones who *are* stupid.
Dec 3, 2012 3:20PM

Of course we're going to be taxed until we bleed from every pore.  That's what govenments are for.  The government exists to do the things too expensive for individuals or businesses, & conduct operations which can't be run on a for profit basis without massive corruption.

Think.  Can you afford an F-22?  Can your employer?  Can you imagine the horror of a for-profit justice system?  Or a for-profit health care syst.... oh, wait....

Dec 3, 2012 3:12PM

Bull guano!  Roll the entire account into a lifetime annuity.  Get a payment every month for the rest of your life.  Of course the principal will be pretty much used up afer 10 years, so every year you live past that, you're stickin' to the man.  You want to take a huge return on your deposit?  Live!  You've got an incentive to exercise & eat right, because the longer you live, the better your return.

Of course I'm speaking to those who made the mistake of getting Individual Retirement Accounts.  If you had gone to your insurer, you would have an Individual Retirement Annuity.

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