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An Important Retirement Tax Deadline Is Fast Approaching. Here's What You Need to Know

Elizabeth O'Brien
And the penalty for blowing the deadline is steep.

As Americans scramble to complete their taxes by April 15, certain older adults have an even sooner deadline to mind: April 1.

It applies to people who turned 70 ½ in 2018 and who have money in traditional 401(k)s or IRAs. If that sounds like you, then Uncle Sam expects his share of your hard-earned savings.

The IRS requires that people begin withdrawing money from their tax-deferred retirement accounts, and paying income taxes on it, starting at age 70 ½. More than 60% of Americans of all ages are unaware of this requirement, according to a survey released last week by TD Ameritrade.

Normally, these required minimum distributions (RMDs), as they’re called, are due each year by Dec. 31. But those taking their initial RMD have a grace period until April 1 of the following year. So if you turned 70 ½ last year and you didn’t take your RMD yet, now’s the time.

Your transactions will likely take a few business days to settle, so don’t wait until April 1 to act — especially since that falls on a Monday this year. The penalty for blowing the deadline is steep: the amount not withdrawn is taxed at 50%.

It’s best if you have enough cash in your IRA or 401(k) to cover your RMD, says Jody R. King, vice president and director of financial planning at Fiduciary Trust in Boston. ( Calculate the amount you’ll need to withdraw here.) Or, if you have a taxable brokerage account, you can transfer your RMD to it in the form of mutual funds or other securities and leave them there as-is, while of course paying taxes on the amount transferred.

If you don’t have enough cash or a taxable brokerage account, you’ll need to sell some securities to satisfy your RMD, and that can add a few business days to your transaction, says Heather Winston, a certified financial planner and assistant director of financial planning and advice at Principal Financial. Tell your financial institutions your plans as soon as possible this week, and take out slightly more than the determined RMD amount as a cushion against market fluctuations, Winston advises.

Here are some other points to keep in mind:

1. Roth 401(k)s are subject to RMDs, but the amount withdrawn is typically not taxed, since you paid taxes at the point of contribution.

2. Roth IRA accounts are not subject to RMDs until the after death of the owner.

3. If you’re still working, you may be allowed to postpone the RMDs from your 401(k), but you cannot postpone RMDs from your traditional IRA (including SEP and SIMPLE IRAs).

4. If you’re taking your first RMD this spring, you’ll still need to take your second by Dec. 31, 2019. This influx of income could bump you into a higher tax bracket and possibly increase your future Medicare premiums.