1 Tax Move Most Retirees Must Make by Dec. 31 or Pay a 50% Penalty

Most people know they have until April 15, 2015 to contribute to an IRA for tax year 2014. However, people who are at 70-1/2 years old and up -- that is, those who were born before July 1, 1944 -- must take their required minimum distributions from their retirement accounts by Dec. 31, 2014 (that's tomorrow!). If you miss this deadline, you incur a penalty of 50% of the distribution you were supposed to take.

Required minimum distributions
Most retirement accounts are tax-deferred, meaning that you don't pay taxes on your gains, but you do pay income tax on your withdrawals when you take the money out. Required minimum distributions, or RMDs, essentially allow the government to budget how much tax money it will receive from people taking money out of their retirement accounts.

RMDs apply to all employer-sponsored retirement plans, including profit-sharing plans, 401(k)s, Roth 401(k)s, 403(b)s, and 457(b)s. RMDs also apply to traditional IRAs as well as SEP IRAs, SARSEP IRAs, and SIMPLE IRAs.

The exception to Dec. 31If you turned 70-1/2 this year -- that is, if your birthday is between June 30, 1943 and July 1, 1944 -- you have until April 1, 2015 to take the RMD. In all subsequent years, you must take your RMD by Dec. 31.

The exceptions for IRAs
There are no minimum distribution requirements for Roth IRAs, as you will have already paid taxes on your contributions.

The exceptions for 401(k)s
Unlike Roth IRAs, Roth 401(k)s do have RMDs. You do not have to take RMDs from a 401(k) if you are still working and contributing to your 401(k), even if you're over 70-1/2 years old. However, you must take a required minimum distribution if you are at least a 5% owner of the business.

Calculating your required minimum distribution
To calculate your RMD, you need the account balance as of Dec. 31 of the previous year.

If you are the beneficiary of someone else's retirement plan, or if your spouse is more than 10 years younger than you and is the sole beneficiary, then special rules apply. Read more here.

Most people can simply divide the account balance by the distribution period, which can be found on the IRS' required minimum distribution worksheet:

Source: IRS. 

For example, if you are 80 and have $100,000 in a traditional IRA, using the table above we see that the distribution period is 18.7. This means you are required to take $5,347.59 ($100,000/18.7) out of your retirement account.

Those with multiple retirement accounts must do the calculation individually for each account. However, you do not need to take the required minimum from each account proportionally. For example, let us say you are 80 years old and have three retirement accounts with respective balances of $70,000, $20,000, and $10,000, for a total of $100,000. You can simply take $5,347.59 out of one of the accounts, rather than taking a proportional amount out of each.

What happens if you miss your required minimum distribution
If you miss the deadline for taking an RMD, the penalty is a severe 50% on the amount of the distribution you were supposed to take. So, using the same example as above, if you missed the Dec. 31 deadline to take your RMD, you would owe a tax penalty of $2,673.80. Make sure you don't miss that distribution.

Educate yourself on taxes to keep more of your money
As Mitt Romney famously (or infamously, depending on whom you ask) said: "I pay all the taxes owed. And not a penny more." Whatever your political leanings, those are wise words to live by. While the tax code contains some stiff penalties for not following the rules, it also contains multiple ways to lower what you owe the government. Be sure you don't end up paying more than what you should really owe.