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If you have money set aside in a tax-deferred IRA or rollover IRA or in an employer's workplace savings plan, your goal may be to get your hands on it as soon as possible. However, if you're squirreling it away to preserve the tax benefits as long as you can, keep in mind that at some point the IRS will require you to begin taking minimum distributions from these accounts.
Generally speaking, you must begin minimum distributions from a qualified tax-advantaged account no later than April 1 of the year after you turn 70 ½. If this sounds confusing, get out a calendar. Mark your 70th birthday, count ahead six months—that's when you turn 70 ½—and mark the next April 1 as your first required minimum distribution (RMD) deadline. As of this date, and in each calendar year that follows, the IRS will require you to take a minimum amount of money from your IRA. If you're still working, you can postpone required distributions from your employer's workplace plan as long as you don't own more than 5% of the company.
There's a formula for figuring required minimum withdrawals, based on your life expectancy and also on the life expectancy of your spouse or other beneficiary, if he or she is more than 10 years younger. You can find it in IRS publication 5990 and there are several online calculators that are easy to use, such as the one at www.kiplinger. com and at www.finance.cch. Most financial providers will also do this calculation for you, but if you have IRAs at different institutions, you'll have to make sure you add up the RMDs for all your accounts. If you have more than one IRA, you can decide whether to take your required distribution from some, all or just one of your accounts. The IRS doesn't care as long as you take the required amount. If you have more than one type of account—a workplace plan and an IRA, you'll have to calculate your RMD for both types of accounts and take the proper amount from each. You can't lump your required distributions together and take them all from your IRA or your workplace account.
If you rolled your qualified retirement assets over to an annuity, your annuity provider should make sure that the amount of income distributed is sufficient to meet the required minimums.
You'll never be required to take a distribution from a Roth IRA in your lifetime. However, if you pass your Roth IRA on to a beneficiary, RMDs are required, based on the beneficiary's life expectancy.
If you fail to take a required minimum distribution, the IRS may assess a 50% penalty—plus you'll be required to take the distribution. This is the most severe penalty the IRS imposes on retirement savings. Don't let it happen to you.
The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, or legal, tax or investment advice, or a legal opinion. Individuals should contact their own professional tax or investment advisors or other professionals to help answer questions about specific situations or needs prior to taking any action plan based on this information.
The Financial Advisors are investment adviser representatives of AARP Financial Inc., an investment adviser.