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Understanding
IRA Distribution Rules
According
to a recent study, 83 percent of people started working with a financial
professional to build a retirement fund.¹ Given the complexity of the rules
surrounding IRAs and employer-sponsored retirement plans, it's easy to
understand why.
Consider
the distribution rules. After age 59½, you can begin withdrawing funds from
tax-deferred retirement plans and avoid the 10 percent early-withdrawal penalty.²
If you decide to wait, you generally must begin taking required minimum
distributions (RMDs) from these plans once you reach age 70½ (Roth IRAs and
annuities are exceptions).³ In succeeding years, minimum annual distributions
must be taken no later than December 31. Failure to take the required annual
distribution could result in a 50 percent income tax penalty on the amount that
should have been withdrawn.
Required
minimum distributions are mandatory to help ensure that you pay taxes on funds
you have accumulated in tax-deferred retirement accounts, which were designed to
provide retirement income.
Key
Rules to Follow
The
latest date you can start taking RMDs is April 1 of the year following the year
in which you turn 70½.4 Although some people wait until the last
possible deadline to start, this could be a mistake because they would have to
take two distributions in the same tax year, which might move them into a higher
tax bracket. It may be better to separate this distribution into different tax
years.
The
annual RMD will depend on your age, the value of your account(s), and your life
expectancy. The calculation is fairly straightforward. Depending on your
situation, use the appropriate IRS table, which shows different ages and
distribution years. Simply divide the value of your retirement account balance
at the end of the previous year by your life expectancy factor, based on the
numbers in the table.
If you
have several IRAs, calculate the RMD for each account to arrive at the total. If
you wish, you can take the total amount from one account to meet your RMD.
However, if you also have money in an employer-sponsored retirement plan, you
need to take money from each type of plan. And if you have more than one
employer plan, you must take separate withdrawals from each.
Most
people understand the importance of putting money into their retirement plans,
but many are not aware of the rules for taking their money out. Please call to
review your options before you make any decisions you might regret later.
1) Investor's
Business Daily, April 29, 2004
2) Distributions from traditional IRAs and employer-sponsored retirement plans
are taxed as ordinary income and, if taken prior to age 59½, may be subject to
an additional 10 percent federal income tax penalty.
3, 4) If still employed, you may be able to delay minimum distributions from
your current employer's plan until after you retire.
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