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Mandatory Retirement Distributions Begin at age 70 1/2: Or else...!

 

Is it true that all retirement plans and IRAs require that distributions begin at age 70 ½? What if I do not make a withdrawal? How much must I withdraw?

 

The short answer is yes; most people must begin withdrawing money from their retirement accounts when they reach age 70 ½. However, there are some exceptions, and for most people these rules are easy to follow.

 

Let’s start by remembering that retirement plans and IRAs are tax deferred investments, not tax forgiven! Not surprisingly, the IRS always intended to tax your retirement assets eventually. Beginning no later than the April 1st of the year following your attainment of age 70 ½, you must begin withdrawing the Required Minimum Distribution amount (called RMDs) each year. These withdrawals are mandatory. Failure to distribute the correct minimum amount will subject you to a 50% tax penalty on the undistributed portion. The annual amount is determined using the IRS Uniform Lifetime Table. For example, a 70 year old must withdraw 3.65% of their account balance on the prior 12/31. If you are 80 years old, you must withdraw 5.35%, and a 90 year old must withdraw 8.77%. These amounts are based upon your remaining life expectancy at each age. You can withdraw the necessary amount in a lump sum, or in installments throughout the year. Since most people are withdrawing at least this much each year to live on, these rules rarely create an additional hardship.

 

There are two exceptions to the RMD rules. First, Roth IRAs, during the lifetime of the original owner, are exempt from the RMD rules. Second, if you are still employed at the company where your retirement assets are invested, you can continue to defer the RMDs until you actually retire. (This exception does not apply if you own 5% or more of the company.)

 

The good news is that all IRA custodians, and the administrators of retirement plans have systems in place to keep track of RMDs. They will calculate the minimum distribution amounts, keep track of your withdrawals during the year, and notify you if additional amounts must be withdrawn. You are responsible for keeping track of these withdrawals and notices. You also must decide which investments or mutual funds must be sold in your account to create the cash to be withdrawn. Of course there are some minor details I did not include here. If you want more information about this process, you may want to read IRS Publication 590-B, consult your tax advisor, or give me a call.

 

Dennis P. Lynch        

 

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