You don’t want to miss the IRA deadline of December 31. Trust us on this.
The clock is ticking on a massively important IRA deadline, and if you don’t want to get penalized by the IRS, you better act by Dec. 31. That’s a looming tax deadline that requires holders of IRAs to make minimum withdrawals or face a hefty tax penalty.
Starting at age 70, people are required to begin making the withdrawals from their tax-free investments. It’s Uncle Sam’s way of financially realizing some revenue after all these years instead of allowing your investments to continue to grow tax free.
It’s not a deadline you want to miss because the IRS penalty is 50 percent. It even applies to those who’ve inherited an IRA from a parent who has passed away.
There’s always some procrastinators out there based on a survey by Fidelity that showed 32 percent of its IRA customers hadn’t made their necessary withdrawals by the last week of October.
“They’re going to get letters from every one of their custodians,” says Eric Brotman, a financial planner with Baltimore-based Brotman Financial Group. “They must by law but whether people read them or understand them is another story.”
The requirement for minimum distributions applies to deductible IRAs and deductible and Roth 401(k) plans. Anyone with an IRA worth $100,000 and turned 70 ½, you would have to withdraw $3,650 based on the 3.65 percent required. That would be added to your income for tax purposes. The required withdrawal increases to 5.35 percent by the time you reach 80.
Brotman says he encourages people to use a CPA or at the very least to go through the full tutorial on TurboTax because it’s tricky. If you’re required to take a $15,000 withdrawal from your IRA and you don’t any, it’s a $7,500 tax penalty. The penalty is double whatever amount you’re short in withdrawing.
Making withdrawals from a plan doesn’t mean you do need to have to spend the money, Brotman says. It just means you have to declare it for taxes.