December 13, 2018 - Douglas Myser

Tax moves to avoid penalties. With the end of 2018 fast approaching, end of year investing and tax moves can pay dividends in the new year. One of those  is for people aged 70 and a half or older: do not forget to take your required minimum distribution or you could face a very large penalty. Required minimum distributions, or RMDs, is the amount you must withdraw from your pre-tax retirement accounts every year. That money is then added to your taxable income for the year.

Tax moves to avoid penalties. But just filing tax returns, many individuals procrastinate when it comes to checking this item off their annual to do list. And if you forget, you could be hit with a 50 percent tax penalty on the amount of the distribution you should have taken. Just about 50 percent of Fidelity customers who have individual retirement accounts with the firm and who must take RMDs have taken them, according to data from late October. That number does not factor in whether those customers have accounts at other firms through which they may have taken their distributions. The amount you need to take for your RMD is calculated based on all of your retirement accounts, the total distribution, however, may be taken out of one account. If you multiply that by a number of years, you can end up with a very large IRS tax debt, and find yourself in need of Tax Resolution Services. If that is the case, you better pursue the IRS Fresh Start Program, prior to a IRS Wage Garnishment.

If you still need to take your RMD for this year, get started sooner rather than later to ensure you meet the December 31 deadline. "I'd recommend giving yourself at least five or six days ahead of time," said Keith Bernhardt, vice president of retirement income at Fidelity. "If you're calling up your firm, if the market's volatile at the time, it might be hard to get through on the phone. I would suggest giving yourself a week or more cushion. Starting your RMD request early will allow enough time to sell out of the security, have the sale settle in that account and let the cash free up, Bernhardt said.