GET FAMILIAR WITH REQUIRED MINIMUM DISTRIBUTIONS
If you invest in a “traditional” IRA and a 401(k) or other employer-sponsored, tax-deferred retirement plan, you can help yourself make progress toward the retirement lifestyle you’ve envisioned. Consequently, you’ll want to let your IRA and 401(k) have growth opportunities for as long as possible. Sooner or later, though, you’ll have to start taking money out of these plans. And when that day arrives, you’ll want to know the withdrawal rules – because, by making the right moves, you can avoid costly penalties and help ensure the most efficient way to tap into your money.
Required Minimum Distributions
The rules governing withdrawals fall under the Internal Revenue Service’s “required minimum distributions” (RMD) guidelines. Here are some of the key RMD points to keep in mind:
• You should take distributions by age 70 1/2 – You should begin taking RMDs in the year in which you turn 70 1/2. If you don’t take your first RMD during that year, you must take it no later than April 1 of the following year. And if you do put it off until April 1, you’ll need to take two distributions in one year. So, for example, if you turn 70 1/2 in May of 2005, you’ll need to take your first RMD by December 31, 2005. If you don’t, you’ll have to take it by April 1, 2006 – and then, you’ll have to take your second RMD by December 31, 2006.
If you don’t take your RMDs on time, you may have to pay the IRS a 50 percent penalty tax on the taxable portion of your uncollected distribution – so make sure you know your dates.
• You can take more than the minimum – You can withdraw more than the RMD, but, as the word “required” suggests, you can’t withdraw less.
• You may be able to delay RMDs if you’re still working – If your employer’s retirement plan permits it, you may not have to take RMDs if you are still working and you are 70 1/2 or older. However, this exception won’t apply if you own five percent or more of your company.
Calculating RMDs
To determine your RMD, you’ll probably use one of these tables:
• Uniform Lifetime Table – Most people will use this table. You look up your age, find your life expectancy factor, take the balance of your retirement accounts as of December 31 of the prior year and then divide by the factor. To illustrate: According to the Uniform Lifetime Table, the factor for age 70 is 27.4, so, for your first RMD, you take your retirement plan balance as of December 31, 2004 (assuming you turn 70 1/2 in 2005) and divide by 27.4.
• Joint Life Table – You can use this table if you have a spouse who is the sole beneficiary and who is more than ten years younger than you are. When you use this table, you take your retirement plan balance from the previous year and divide it by a joint life expectancy factor. Since this number will be higher than your individual life expectancy factor, your RMDs will be lower than if they were calculated on the Uniform Lifetime Table.
Before you start taking RMDs, see your tax advisor. You’ll want to get the numbers right – right from the start.
> Read More Information About Us
> More Articles Written By Our Staff
- Celebrating 20 Years Of Community At The Stand - April 12, 2024
- First Positive Case Of Chronic Wasting Disease In Indiana - April 12, 2024
- Southwest Allen County Schools Embark On Major Tree Plantings - April 12, 2024