Although many milestones happen early in life, like learning to drive and voting for the first time, a couple important events happen many years later. One important date to remember is age 70 1/2. After this day you’re required to begin taking minimum distributions from your IRA plans. Although Roth IRAs are exempt from this plan, all other IRA and 401k type plans, such as 403b, 457 and Simple IRA plans, must begin minimum distributions. It’s important to know the rules around required minimum distributions because the penalty for failure is 50 percent of the amount you neglected to withdraw.
Review the 70 1/2 rule. Funds must be withdrawn by April 1 of the year following the date you turn 70 1/2. Find the value of each retirement plan on December 31. This can be found on your most recent statement or online plan website or by calling the management company. You may commingle all IRA values to find the withdrawal amount and then take a distribution from any IRA you choose; 401k, 403b or 457 plans must be calculated individually and withdrawals removed from each one.
Find the tax table with your life expectancy. The IRS provides two worksheets for people seeking required minimum withdrawal calculations (see References). The first is for IRA owners with a spouse who is sole beneficiary of the IRA and is more than 10 years younger than the IRA holder. The second table is for everyone else. Alternately, some institutions, such as the Financial Planning Association, offer online calculators to help you find your required minimum distribution (see Resources).
Calculate the withdrawal amount. Find your age on the chart to discover your distribution period. Divide your IRA value by the distribution period factor. This product is your required minimum distribution for the current year. Repeat this process for each retirement plan. Add together your IRA withdrawal amounts into a single number if you plan to make a withdrawal from one account rather than from each individual fund.
Decide how to take your withdrawal. You may remove funds however you choose from your IRA as long as you meet the April 1 deadline of the first year you’re required to take distributions or the December 31 deadline of each subsequent year. Some people prefer monthly payments to supplement their income. Others prefer a single payment annually. Financial expert Jean Chazky recommends basing your withdrawal amount and timing on your tax situation and expectations for tax rates. If you have a bad year financially or think taxes are going to rise, take more out early.
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- Rules Governing Withdrawals From IRA Accounts
- The Tax Impact of IRA Withdrawal for a First-Time Home Buyer