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With final holiday preparations looming, the last thing anyone wants to think about is next April’s tax bill. But if you’re over age 70½ and have any tax-deferred retirement accounts (like an IRA), put down the wrapping paper and listen up: IRS rules say that, with few exceptions, you must take required minimum distributions (RMDs) from your accounts by December 31 of each year — and pay taxes on them — or face severe financial penalties.
Here’s what you need to know about RMDs:
• Congress devised IRAs, 401(k) plans and other tax-deferred retirement accounts to encourage people to save for their own retirement. Aside from Roth plans, people generally contribute “pretax” dollars to these accounts, which means the contributions and their investment earnings aren’t taxed until withdrawn after retirement.
In exchange for allowing your account to grow tax-free for decades, Congress also decreed that minimum amounts must be withdrawn — and taxed — each year after you reach 70½. To ensure these rules are followed, unless you meet certain narrowly defined conditions, you’ll have to pay an excess accumulation tax equal to 50 percent of the RMD you should have taken; plus you’ll still have to take the distribution and pay regular income tax on it.
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