The advantage of saving for retirement in an IRA or 401(k) plan is enjoying tax breaks on the way to accumulating savings. With a traditional IRA or 401(k), your contributions are made on a pre-tax basis, protecting part of your income from the IRS. Investment earnings are then tax-deferred until withdrawals, which are taxable, are taken in retirement.
meanwhile roth IRAs and 401(k)s don’t give you an advance tax exemption on your contributions. but what they do The offer consists of tax-free investment earnings and tax-free withdrawals in retirement.
The problem with these tax-advantaged retirement plans, however, is that they can be restrictive. For one thing, you can’t withdraw an IRA or 401(k) before age 59½. If you do, you will incur a 10% early withdrawal penalty (although there are limited exceptions).
People are also reading…
But that’s not the worst penalty you could face if you don’t follow the rules of your retirement plan. In fact, some seniors risk a 50% penalty on some of their money if they don’t act right away.
Have you taken your first RMD?
While IRAs and 401(k)s offer many tax benefits, they also don’t allow you to leave your savings indefinitely. Rather, you are eventually forced to take minimum required distributionsor RMD, of your account from the age of 72.
Specifically, your first RMD is due on April 1 of the year following the year you turn age 72. What this means is that if he turned 72 last year, his first RMD is due on April 1, 2022. And if he hasn’t taken it yet, you may want to arrange for that withdrawal to be made later. righ now. If he doesn’t, he will face a 50% penalty on the amount he doesn’t remove from his retirement plan.
Note that RMDs used to appear at a younger age: 70 1/2. So today’s seniors have a little more freedom when it comes to starting RMD. But once you’re hooked on those retreats, it’s important to take them every year. If you don’t, you are effectively throwing money away.
How RMDs are calculated
The amount of money you must withdraw from your retirement plan can change from year to year and depends on two factors: your life expectancy and your age. Often your plan’s custodian or administrator will calculate your RMD for you, or you can ask your financial advisor or IRS website for help with those numbers.
If you don’t like the idea of having to take RMDs every year, then there’s a solution you can consider: make a Roth IRA conversion. Roth IRAs are the only tax-advantaged retirement plan with no RMD. Even Roth 401(k) plans force you to take them.
That said, the advantage of having a Roth 401(k) is that your RMDs won’t create a tax liability for you, whereas with a traditional IRA or 401(k), you have to pay taxes on your RMDs. To be clear, those taxes aren’t a penalty, they’re the same taxes that apply to any withdrawal you make from a non-Roth account.
don’t lose money
If you’ve yet to take your first RMD and it’s due on April 1, drop what you’re doing and figure out the most efficient way to get that money out of your account. And then be sure to factor in any future RMD deadlines.
The April 1 deadline is a special deadline that applies only to your initial RMD. So if you’re withdrawing funds from your retirement plan now after turning 72 last year, what you’re really doing is taking your 2021 RMD.
Going forward, RMDs expire on December 31 of each year. So if you’re taking your first RMD now, you’ll need to take your next one, for 2022, by December 31 of this year. Plan that accordingly so you’re not pressed for time or caught off guard by a frustratingly high tax bill.
The $18,984 Social Security Bonus Most Retirees Completely Overlook
If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example: An easy hack could pay you up to $18,984 more… every year! Once you know how to maximize your Social Security benefits, we believe you’ll be able to retire with the confidence and peace of mind we all seek. Simply click here to find out how to learn more about these strategies..
The Motley Fool has a disclosure policy.