How to avoid a 50 percent hit on your retirement savings

Make the most of your required minimum distribution

The clock is running out on retirees who haven't taken enough from their retirement accounts this year.

IRS rules on the so-called required minimum distributions generally kick in once you reach age 70½. For 401(k) plans and other defined contribution plans, it's either when you turn 70½. or you retire, whichever is later. If you've inherited an IRA, you might also be subject to RMDs, even if your own retirement is years away.

How much you need to take is usually based on the account balance at the end of the previous year, and your life expectancy based on your age. Fail to withdraw enough, and there's a 50 percent penalty on the shortfall.

Despite that steep penalty, retirees tend to procrastinate. As of Dec. 2, about 41 percent of Fidelity customers required to take an RMD hadn't yet withdrawn the full amount they need to.

"People get busy at the end of the year, with holidays and other family obligations," said Maura Cassidy, vice president for retirement at Fidelity. "The time flies and they could forget."

Aim to line up your distribution ASAP, if you haven't already. It can take a few days for trades to settle so your withdrawal can be processed, Cassidy said, and a few days with early market closings and closed markets can further tighten the time frame.

Figuring out how much you need to take is generally easy, said Timothy Speiss, partner in charge of the personal wealth advisors group at EisnerAmper LLP in New York.

Retirement plan administrators often automatically compute the number and track it against any withdrawals you make throughout the year — look for it on your online account dashboard and in your mailed statements.

Financial advisors typically calculate RMDs for their clients, too, communicating with them early in the year and nudging procrastinators as needed, said Kevin Meehan, a certified financial planner and the regional president of Wealth Enhancement Group in Itasca, Illinois.

The time flies and they could forget.
Maura Cassidy

Even if you think you have that number nailed down, it can help to strategize with an advisor. If you don't need the full distribution, for example, you might be able to re-invest the funds or make a charitable donation directly from your account.

You'll also want to make sure you're following the rules.

"There are different rules for the different types of accounts," Cassidy said.

IRAs are aggregated, she said — whether you have one IRA or six, your required withdrawal is based on the total across all the accounts, and you can pull from one or more to hit that number. (If you're married, though, you can't take an RMD on behalf of one spouse from the other's account.)

RMDs from employer-sponsored accounts like a 401(k), on the other hand, are specific to the account. So if you have three plans from different former employers, you'll have three separate RMDs, one for each.

Retirees facing the RMD for the first time may also have a little more leeway to procrastinate. The first year you're subject to RMD rules, you can take a qualified withdrawal by April 1 of the following year, Cassidy said.

If you turned 70½ in October 2016, for example, you'll need to make that first withdrawal by April 1, 2017. But taking advantage of the grace period is not a recommended strategy, she said. You'd still need an RMD for 2017, and double withdrawals that year could have a significant tax impact.

If you do forget, the IRS may not hit you with that 50 percent penalty. Take the RMD as soon as you realize the error, Cassidy said. Then file a Form 5329 with your next tax return along with a letter explaining whatever it was that led to the misstep — you were wrapped up in the medical care of a spouse, for example, misunderstood the rules, or simply forgot.

"In the past, they have been pretty forgiving," she said.