For many, Individual Retirement Accounts (IRAs) are a key retirement savings vehicle, either at the onset of saving, or later, perhaps when a pension, profit-sharing, or 401(k) plan will, more than likely, be consolidated into an IRA. An integral part of any IRA retirement strategy is staying in touch with tax laws that may affect your savings, for better or worse. Knowing the rules may help you decrease tax penalties and increase your savings.
Current rules mandate that you must begin taking minimum distributions from your IRA by April 1st of the year after reaching age 70½. However, employer-sponsored qualified plan distributions can be postponed until retirement if you continue working past age 70½ and are not an owner-employee.
The first required distribution is actually for the year in which you attain age 70½—the Internal Revenue Service (IRS) merely lets you postpone it until April 1st of the following year. If you did postpone the first distribution, a second distribution would be due by December 31st for the current year, substantially increasing taxable income for that year.
The Internal Revenue Service (IRS) uses life expectancy figures to determine the required minimum distributions (RMDs) IRA holders age 70½ and older must receive. Population trends indicate that people are living longer and, thus, may need income for an extended period of time. In response, the IRS has increased life expectancy figures and, as a result, the mandatory withdrawal amounts have decreased. The reduced requirements may afford people the opportunity to keep their savings tax-sheltered for a longer period of time. It is important to note that an account holder may withdraw more than the minimum, but failure to take required withdrawals results in a 50% tax penalty on the shortfall.
Minimum distributions may now be calculated according to one standard table based on the joint life expectancy of the taxpayer and a hypothetical beneficiary who is ten years younger, even if no beneficiary is named. If the designated beneficiary is a spouse who is more than ten years younger than the owner, a separate, generally more favorable table (Joint Life and Last Survivor Expectancy) is used. In the event that a person has more than one IRA, the sum of the separate minimum distributions is the total IRA amount that must be withdrawn for the year. However, this amount can be taken out of any one or more IRA accounts.
Whether you are about to retire, or just doing a little retirement daydreaming, there are intricate rules that will require you to make some important decisions. Qualified tax, legal, and financial professionals can help chart a course that’s right for you.
Withdrawals are subject to ordinary income tax and, if taken prior to age 59½, a 10% IRS penalty will apply.