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1 Tax Deadline You're Forgetting

By Nicole Seghetti – Updated Feb 15, 2017 at 11:40AM

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Neglecting this tax deadline will cost you big time.

April 15 takes center stage come tax time. But there's another tax deadline equally deserving of your attention -- and neglecting it could cost you big time. Here's what it is and how to deal with it.

The tax deadline you've never heard of
If you turned 70-1/2 years old in 2013, you have a critical tax deadline coming up. April 1 is the deadline for people who turned 70-1/2 to take their first annual required minimum distribution from their Traditional IRAs and 401(k)s. Typically you're supposed to take it by Dec. 31 of the year you turn 70-1/2, but the deadline is extended to April 1 for the first year. For every year following, you have to take the distribution by the end of the year. Unlike Traditional IRAs and 401(k)s, Roth IRAs have no RMDs.

Postponing your RMD will cost you
Forgetring to take your RMD will hurt you significantly. Neglecting to withdraw the RMD will result in a 50% tax on the amount not withdrawn! It's up to the account holder, not the financial institution holding the retirement account, to make sure he or she withdraws the correct amount. You can withdraw more than the minimum, but any extra won't count toward satisfying next year's RMD.

Your RMD will be different from your next-door neighbor's. It's calculated by dividing the prior year-end balance of that IRA or retirement plan account by a life expectancy factor that the IRS publishes. If you have multiple retirement accounts, you'll need to calculate your RMD and make a withdrawal from each one. Or you can calculate your total RMD based on the aggregate prior year-end balances and take the total RMD amount from any single account. This strategy works well when taking the entire withdrawal from an IRA that houses lower-returning investments.

Take action today
Given the expensive penalty for failing to make a withdrawal, don't let the April 1 tax deadline slip past you. Take care of your RMD today. Reach out to all of the brokerage firms and institutions that manage your retirement accounts for guidance on RMDs. Also, be sure to check out the IRS' information on this topic. Your wallet will thank you.

Follow Nicole Seghetti on Twitter @NicoleSeghetti. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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