the tax bite

Answering the Call of RMDs

Crucial 4/1 tax deadline Falls on a weekend for seniors who turned 70 ½ in 2016

Data and research from Fidelity Brokerage. Reprinted with permission. Visit here.

March 21, 2017 — First, the good news: as with last year, due to a federal holiday, this year’s deadline for filing personal income taxes provides taxpayers with three extra calendar days.

Unfortunately, this isn’t the case for those who turned 70½ in 2016 and are required to take minimum distributions (RMDs) from their IRAs and 401(k)s.

For folks who may need to sell stocks or bonds in order to fund their RMD, because April 1 falls on a Saturday this year, March 31 is the last day to do so and avoid a costly tax penalty—50 percent on any amounts not withdrawn—a detail many investors unknowingly overlook. Those with sufficient cash in their IRA can take distributions from their Fidelity accounts any day of the week.

According to Fidelity data, as of December 23, 2016, 43% percent of the company’s investors eligible to take their first RMD from their IRAs in 2016 had not yet taken the full amount—and even worse, of those, 40% percent had not taken any RMD to date for the year. While those numbers are better than 2015, when 46% percent had not taken the full amount (and of those, 43% percent had not made any withdrawals), it’s clear many investors continue to leave themselves vulnerable to significant tax penalties when their withdrawals are not made in a timely fashion.

A quick glance of the data:

Year

Not taken Full RMD Total

Not taken any

Took Some but not all

2016

43%

40%

3%

2015

46%

43%

3%

What is an RMD? The RMD is designed to ensure individuals aren’t deferring paying taxes on retirement savings indefinitely. That’s why, beginning in the year you turn 70½, IRS regulations generally require people to withdraw a minimum amount of money each year from tax-deferred retirement accounts, such as traditional IRAs and defined contribution plans such as 401(k) and 403(b)s, or pay substantial penalties. Typically, investors age 70½ and older are required to take RMDs by December 31 each tax year, but if they are taking one for the first time, the deadline is extended until April 1 of the following year.

Clearing up confusion over basic RMD rules can help investors understand not only how much they need to withdraw from their retirement accounts, but also when the withdrawals need to happen. Those who have IRAs and 401(k) accounts held with more than one institution may need extra help managing multiple accounts and the RMD rules for different account types. Knowing which accounts to withdraw from first can be a critical decision for many.

To help educate the millions of investors facing RMDs, Fidelity offers a variety of resources, including:

As you plan stories about RMDs or other tax and retirement planning topics, please feel free to contact me anytime at (401) 292-7328. I’d be happy to arrange an interview with a Fidelity executive who can provide more insight into RMD regulations and provide information for those required to take RMDs.

 

 

 

Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.
Be sure you understand the tax consequences of any withdrawal or distribution before you initiate one.