Taxpayers of all ages are paying close attention to their tax returns right now, as new tax reform rules have made things a lot more complicated. For many, the April 15 deadline seems too close for comfort.

Yet those who recently became septuagenarians need to pay close attention to a different rule that can be even more costly. There's an April 1 deadline for those who reached age 70 1/2 at some point during 2018 to start withdrawing required minimum distributions from retirement accounts like traditional IRAs and 401(k)s. If you miss that deadline, you'll owe one of the most draconian penalties in the IRS arsenal: 50% of what you should've withdrawn.

Jar with sticky labeled retirement, holding money next to a calculator.

Image source: Getty Images.

How required minimum distributions work

Retirement accounts were designed to help Americans save for retirement, but lawmakers didn't want them to last forever. Accordingly, the provisions allowing tax-favored retirement accounts included provisions that would force them to start taking money out at a certain point.

For whatever reason, the date that lawmakers decided should be the point at which you must start taking money out of retirement accounts was six months after your 70th birthday. Therefore, if you were born between July 1, 1947 and June 30, 1948, you have until April 1 to take out your RMD for the 2018 tax year. Then, in 2019 and beyond, you won't have as much time to take distributions, as the deadline moves up to Dec. 31.

Calculating your RMD

To figure out how much to withdraw, you'll need to use an IRS worksheet [opens PDF] to make the necessary calculations. The calculation involves a three-step process:

  • Determine the balance of your retirement account as of Dec. 31, 2017.
  • Look up the appropriate life expectancy factor for your age as provided on the worksheet.
  • Divide the balance by the factor.

The result is how much your RMD will have to be for you to avoid a 50% penalty.

For those who just turned 70 1/2 last year, the distribution factor will be either 27.4 or 26.5, depending on whether you hit age 71 before or after the end of 2018. That works out to a minimum distribution of $365 to $377 for every $10,000 you had in your retirement accounts coming into 2018.

That withdrawal amount isn't too large, but over time, the percentages you'll have to take will go up. The required withdrawal percentage reaches 5% at age 79, 7% at 86, and 10% at 93. As you spend down your retirement savings, however, the actual dollar amounts of those withdrawals rarely go up as much as the percentages would suggest.

Take what you need

There are a couple of areas where people tend to get tripped up. First, if you have a Roth IRA, you don't need to take RMDs from it or include its assets in your RMD calculations. That's true regardless of whether you started out contributing to a Roth IRA or you instead converted existing traditional 401(k) or IRA assets to a Roth more recently.

In addition, just because you have to take out a minimum distribution doesn't mean that you can't take more than the minimum if you need it. By the time you hit 70 1/2 years old, there aren't any penalties for taking out as much of your IRA and 401(k) assets as you want. However, just keep in mind that you will owe income tax on the amount you withdraw from a traditional IRA or 401(k), so you won't necessarily want to take out more than you actually need.

Do it today

April 1 is just days away, and with a weekend between now and then, you'll want to get started with the process of taking your first RMD sooner rather than later. Avoiding a big 50% penalty is worth it, so don't let any more time go by before you arrange for an appropriately sized withdrawal from your retirement accounts.