Retirees: Missing this April 1 tax deadline will cost you a 50% penalty
Retirees: This looming April 1 tax deadline is no April Fools' joke.
Consumers subject to required minimum distributions from retirement accounts for the first time have just a few days left under a grace period to make their withdrawals. Miss the cutoff, and you'll face a 50 percent tax penalty.
Under IRS rules, RMDs generally kick in on IRAs once you reach age 70½. For 401(k) plans and other defined contribution plans, it's typically when you turn 70½ or you retire, whichever is later.
Typically, the deadline to take a particular year's RMD is Dec. 31 of that year. But in the year you're first required to take an RMD, you have until April 1 of the following year to make that withdrawal.
(For more of the ins and outs on RMDs, including how to figure out how much to take, see our guide here .)
RMD newbies tend to procrastinate. As of late last year, 40 percent of Fidelity investors eligible to take their first distribution that year hadn't taken any, according to Fidelity. Three percent had withdrawn some, but not enough to meet the minimum.
"They may have missed reading letters that we've sent, or information other firms have sent," said Maura Cassidy, vice president of retirement at Fidelity.
If you're taking advantage of the grace period, keep in mind that April 1 falls on a Saturday this year, said Cassidy. That doesn't change the deadline, but it does mean that unless you have cash holdings to withdraw, you'll need to make your request a few business days ahead to allow time for trades to settle, she said. (If you do have cash in your account, Fidelity says you can take that withdrawal "any day of the week.")
Procrastinators should start strategizing about ways to cut next year's tax bill, said certified public accountant Benjamin Tobias, president of Tobias Financial Advisors in Plantation, Florida. Even if the grace period has you taking your first RMD this spring, you'll still need to take your RMD for 2017 by Dec. 31 — and two in one year could make a big impact, he said.
What if you're not a first-timer, and reading this is a reminder that you missed the deadline?
Take your RMD for 2016 as soon as possible, and file a Form 5329 with your tax return this year, Cassidy said.
"Attach a letter explaining why you missed taking it last year," she said. "Usually the IRS has waived the penalty."
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