Fidelity Investments recently reported that about half of its clients who were older than 70½—and required to take an annual distribution from their retirement account—had not yet done so for 2018.

They should do so soon. Not taking all of your required minimum distribution (often referred to as an RMD) before the year closes would be a costly mistake. You could end up owing a 50 percent excise tax on the portion not taken. That's on top of the ordinary income tax you must pay on the money you receive.

"The RMD amounts can look pretty small at the beginning, but if you end up paying a penalty they can look a lot larger," says Jill Hollander, a fee-only financial planner in Marin County, in California.

Calculate Your RMD ASAP

Though the rules say that you must receive your 2018 RMD by Dec. 31, don't leave it to the last minute. Determine how much to take from each of your retirement accounts, perhaps with the help of a financial adviser. You could also turn to a calculator such as the one offered by T. Rowe Price. Then ensure that your account custodian or retirement-plan administrator has enough time to properly execute the trades and arrange for the distribution. 

More on Retirement Planning

Keep in mind that if you have more than one IRA account, the IRS says you must first make a separate RMD calculation for each IRA that you own. Then you can withdraw the total amount from one IRA or split your distribution among your IRAs. The same is true for 403(b) retirement accounts. 

If you have money in a 401(k) or 457(b), you don't have as much flexibility. You must take separate distributions from each of those accounts based on the RMD you've calculated for that account. 

Use Your RMD to Reduce Your Tax Bill

Now comes the bad news. You'll pay taxes at your ordinary income tax rate on the income you generated. But there are a couple of strategies that can help reduce the amount you'll pay on your distributions, if you plan ahead.

Make a qualified charitable distribution. Contributions of up to $100,000 made directly from an IRA to a qualified charity are not taxable. By making such a contribution from your IRA, you won't be charged taxes and you reduce the base upon which the amount of your distribution is calculated.

By lowering the base on which your required minimum distributions are calculated, you could have another benefit: Your modified adjusted gross income will be lower for the year, which could help you stay within income ranges to avoid surcharges on Medicare Part B and D premiums. 

Fund an annuity. To encourage savers to fully fund retirement far into the future, the IRS allows IRA owners to put a portion of their IRA balance toward buying “qualified longevity annuity contracts.” (PDF) You don’t have to take an RMD from that portion of your IRA until age 85, compared with age 70½, when you usually have to take RMDs. That should save you in taxes.

With a longevity annuity, you pay a one-time, lump-sum premium, or periodic premiums early on. You then get guaranteed income later in life. The IRS currently exempts longevity annuity premiums of up to $125,000 or 25 percent of your IRA account, whichever amount is less. Traditional, SEP-IRAs, SIMPLE IRAs, and 401(k) plans are included, as are 403(b) and 457 plans.