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That Other April Deadline

Tick tock. There’s a deadline creeping up on some of you. And it’s not April 18. If you turned 70½ in 2010 you have until April 1, 2011 to take your first required minimum distributions (RMDs) from all tax-deferred accounts such as individual retirement accounts (excluding Roths) and 401(k)s.

The IRS requires you to take a minimum amount of money from your tax-deferred retirement accounts each year beginning the calendar year after you turn 70½. Typically, you need to do this before December 31. However, you get a three-month extension into the following year for your first distribution. Be aware that if you waited until April to take that first withdrawal, you must take two in a single calendar year. That could end up boosting you into a higher tax bracket.

If you don’t take your distribution on time, you’ll likely get hit with a penalty of up to 50% of the amount not taken.

Figuring out the amount of your first and future RMDs isn’t complicated. Take the year-end balance on your account and divide by a so-called life-expectancy factor, which you’ll find on the Uniform Lifetime Table provided by the IRS. (The IRS provides two different tables depending on your marital status, the age of your spouse and the beneficiary of your account.) “Once people get into a rhythm, things tend to go more smoothly,” says Stuart Ritter, a vice president and certified financial planner at T. Rowe Price.

If you have multiple IRAs, you have the option to calculate the RMD for each account and make an aggregate withdrawal from one. This isn’t the case for 401(k) plans, which require owners to withdraw (at least) that calculated amount from each account owned.

If you’re approaching 70½, it’s a good idea to get in touch with your financial-services firm to map out your distributions. The IRS does require firms to send statements regarding RMDs to clients by January 31st of the year they turn 70½ (as long as that firm holds the client’s IRA as of December 31st of the prior year and an RMD is required). Some financial services firms send their own reminders to clients approaching the RMD deadline.

If you’re already taking distributions, say every month, that add up to at least the minimum amount, you don’t have to make an additional withdrawal. And you can always take out more than the RMD calculation: “‘M’ stands for minimum,” says Ritter.

Readers, did your financial-services firm do a thorough job of coaching you or your family member’s approach to 70½?

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About The Tax Blog

  • The Tax Blog brings together a team of award-winning tax journalists from the Dow Jones network and around the web to examine the tax issues, changes and legislation that affect families, investors and small business owners. Our contributors include Tax Report columnist Laura Saunders (WSJ), Tax Guy columnist Bill Bischoff and senior reporter Jilian Mincer (SmartMoney.com), retirement-focused reporter Anne Tergesen (WSJ), wealth management writer Arden Dale (Dow Jones Newswires), TaxWatch columnist Eva Rosenberg and personal finance reporter Andrea Coombes (MarketWatch), and reporter Alyssa Abkowitz (SmartMoney). They’ll provide the latest news and insight, mine the tax code for tips and loopholes, and answer your questions about tricky tax situations. Contact the The Tax Blog with ideas, suggestions or tax questions at thetaxblog@dowjones.com.

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