Avoid a Massive Tax on Failed Required Minimum Distributions

Required minimum distribution (RMD) on your IRA account will begin at age 70-1/2. At that point, you will be told how much you must withdraw each year, based on the amount of money in your account and your life expectancy. If you do not take out the RMD, you will end up paying a 50 percent excise tax.

The RMD Excise Tax

The 50 percent tax will only occur on the funds you were supposed to withdraw for your RMD. So, if your distribution was $2,000, you will only receive $1,000 of that money. The excise will occur on April 15 of the year following the year when you failed to withdraw. In other words, the penalty is assessed when you file your year-end taxes.

Avoiding the Excise Tax

The easiest way to avoid paying the tax is by taking your RMD on time. Even if you plan on reinvesting the money, you must withdraw it and deposit it in another investment account. This must be done by April 1, on the first year you are required to take a distribution. Then, it must be completed by December 31, each following year. You may take the distribution in multiple amounts during the year, but the full amount must be withdrawn by the deadline.

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