Big Penalties for Failure to Withdraw From IRAs (MRD)

The government wants a piece of your retirement savings -- at least, it wants the taxes on your annual minimum required distribution (MRD). You didn't think that they would let you get away with simply passing on all your IRA money to your designated beneficiary, did you?

Every year, starting with the calendar year after you reach age 70-1/2, you are required to total up all your IRA and 40l(k) assets, and withdraw a minimum amount, which can be taken from one, or several of your accounts. If you don't make the withdrawal, you will pay penalties of up to 50 percent of the amount you should have withdrawn!

That should catch your attention! The government is serious about getting its share of your retirement money.


If you turned age 70-1/2 this year, along with millions of other baby boomers, you have until April 1 of next year (2014) to make the withdrawal. But since you must also withdraw money for calendar year 2014, and since those subsequent withdrawals must be made before December 31st each year, you might want to take your first distribution now, before year end 2013. That way, you won't have to pay taxes on two distributions in one year, possibly putting you into a higher tax bracket.

Remember, after your initial RMD, you must take your withdrawal before December 31 of each year. You have the option of taking it at year end, or having it automatically withdrawn and deposited in your checking account every month, if you use a custodian like Fidelity, which offers this service.


You are not required to take a withdrawal from a Roth IRA account. And if you are still working after age 70-1/2, under some circumstances you can delay withdrawals from an employer's 40l(k) or 403(b) plan. Also, if you made non-deductible contributions to your retirement plan, the accounting gets complicated. You must still make the RMD based on the entire amount in your plan, but only a portion of the withdrawal, representing deductible contributions, plus all earnings will be taxable.

How Much?

The amount required to be withdrawn is based on a formula determined by the total amount you have in your accounts, your age, and your life expectancy according to actuarial charts. You don't have to do the math yourself. Each custodian is required by the IRS to do the calculation for you. But what you must do is total up the value of all your accounts unless they are held at one financial institution, and make sure you take out the appropriate amount -- which can come from one IRA or several, as long as you take the required amount.

To figure out the total value upon which you will base this year's distribution, you will use the total valuation as of December 31st of the year preceding the current year. Then you can make your distribution at the end of the current year - allowing plenty of time to avoid the year-end rush -- or spread the distributions out over the year. You are going to have to keep careful records.

To get a very rough idea of how the formula works, go to this calculator posted by FINRA, which will give you an estimate based on your total qualified retirement savings, your age, and the age of your beneficiary.

Speaking of year-end rush, Fidelity recently reported that as of November 1, nearly two-thirds of their more than half a million IRA customers have yet to take their MRD for 2013. Obviously this is a challenging issue, and many people wait until the last minute.

Fidelity offers an automatic RMD service, so you don't miss the deadline or make a mistake in your calculations. They will send you a new MRD amount each January 1st with the calculation details and remind you of the distribution options you have chosen for those automatic withdrawals such as the schedule and tax withholding. Distributions can be taken at year end, or over the course of the year. Fidelity reports an increase of 152 percent in clients using this service.

From Where? How Reported?

You can take your RMD from one or more of your accounts. Those withdrawals will be reported as such by each custodian - and must add up to the total required. They report distributions to the IRS on form 1099R. You will have a copy to file with your 1040 tax return for the year. You also file Form 5329, which is used to state your MRD, and what you distributed and from where. The IRS matches your documentation with Form 5498, which each custodian sends to the IRS each year, listing all your IRA assets.

After working all these years to build up your retirement assets, now the government is going to require you to carefully dismantle that edifice, with the goal of distributing your IRA over your lifetime. If you don't live long enough to do this, your heirs will benefit from the remainder. And if you live too long and run out of money to distribute, the government figures that's your problem.

There is no rule that requires you to spend all your minimum required distributions. And if longevity runs in your family, you might certainly want to save some of that money for a winter day, even though it will no longer grow tax-deferred. That's The Savage Truth.