Retirees: Don't Miss the Deadline for Required IRA, 401(k) Distributions

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Retired 401K paperworkDuring the tough times of the past several years, retirees have done everything they could to stretch their retirement accounts as far as they could go. But trying to stretch them too far will get you into trouble with the IRS.

Every year, most people who are 70½ years old or older by the end of the year have to take required minimum distributions from their traditional IRAs and 401(k) accounts. Although those who just turned 70½ in the past year have until April 1 to take their first distribution, others face a December 31 deadline. If you try to cheat -- or simply forget -- you'll get a nasty wake-up call from the IRS in the form of a big penalty: 50 percent of the distribution you should have taken.

Why So Harsh?

The big penalty serves as a reminder of how important withdrawals from retirement accounts are to the proper functioning of the tax laws. When Congress set up the rules governing IRAs and other retirement plans, it knew that savers would want to take maximum advantage of tax deferral. By requiring minimum distributions, Congress ensured that those tax advantages would eventually come to an end.

The process of calculating your required minimum distribution can be tricky. Essentially, you're required to take a fraction of your account every year, with the particular fraction based on your life expectancy as calculated by the IRS.

For instance, if the IRS tables say that you have a life expectancy of 20 years, then you'll need to withdraw 1/20 -- or 5 percent -- of your total account balance as of the end of the previous year.

Special Rules to Watch

Required minimum distributions aren't just for retirees. Although workers can sometimes defer having to take distributions from 401(k) plans if they're still employed beyond age 70½, IRAs aren't eligible for that exception even if you're still working.

Moreover, if you've inherited an IRA, you may have to take minimum distributions regardless of your age. Provisions allowing you to stretch out IRA distributions throughout your lifetime still require that you take a minimum amount each year, again based on your life expectancy.

For more on required minimum distributions, including the tables you'll need to calculate your personal amount, click here to go to the IRS website.


You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger.


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pdbliz

I bought a new glass jar and a new metal box ,,,,,,,,And,,,a new shovel to dig the hole to hide my money from the goverment....
People,,,If you think the great one is your friend,,wait till 2014,,,,TAX,,,TAX,,,ON ALL PEOPLE,,,,,,,AND,,,HEALTH Care,,,,,YOU WILL WAIT IN A HUGE LINE,,,,,,,, and,,,may see a new doctor intern,,,because the good drs,,,are leaving.....
YOU GOT HOPE AND CHANGE,,,,BUT,,YOU MAY GET ONLY CHANGE.!!!!

December 06 2012 at 9:38 AM Report abuse rate up rate down Reply
viking9343

Here's an idea....If you save money for YOUR own expenses when you get old, you should get to use all YOUR money tax free. Maybe then people would start to take care of themselves.

December 05 2012 at 4:04 PM Report abuse +2 rate up rate down Reply
1 reply to viking9343's comment
davefromfwb1

To do that you'd have to keep your money stashed under the mattress.....that's about a good enough place as any...nowdays.

December 05 2012 at 11:48 PM Report abuse +1 rate up rate down Reply
robert.michaelson

My Third party administrator, Steidle Pension Solutions, has helped me make sure i never miss contribution deadlines. They are always on top of things, and i would recommend them to anyone looking for a TPA to adminster their 401k Plan.

December 05 2012 at 2:24 PM Report abuse -1 rate up rate down Reply
rexitalia

LOL What IRA contributions? Who can afford to fund anything these days, what if you have no job? Oh yea I forgot "the hope and change" is going to make the payment for me.

December 05 2012 at 1:01 PM Report abuse +4 rate up rate down Reply
1 reply to rexitalia's comment
yearsocrapleft

THE MUSLIM CLOWNS RECORD UNEMPLOYMENT~~RECORD FORECLOSURES~, RECORD JOB LOSSES WILL ,BE WITH US FOR ANOTHER 4 YEARS LIKE THE LAST 4 YEARS OF PURE GARBAGE . ! THERE IS NO "HOPE" N NOTHING WILL "CHANGE" . !

December 05 2012 at 3:06 PM Report abuse +1 rate up rate down Reply
1 reply to yearsocrapleft's comment
Steve

And the S&P 500, +57% during Obama's 4 years after -32% under Bush! And the Nasdaq, almost double under Obama, after -36% under Bush! I worked for the same company for 37 years and lost my job 3 times under Bush due to a horrific economy and necessary consolidation. Always had a new opportunity, not anywhere that I wanted to live, but had to. I was hopeful that the Republicans could come up with a qualified candidate, even a viable one and I was all in. They could not and now all Republicans with political aspirations have run as far and fast from him as possible.

December 12 2012 at 1:47 PM Report abuse rate up rate down