If you have money in an individual retirement account, once you turn 70.5, the Internal Revenue Service requires that you withdraw money from this account every year, even if you still work.
In effect, just after you turn 70, the IRS requires you to stop saving all your money in your individual retirement account “IRA” or most other employer-based retirement accounts, such as 401(k), 403(b) and 457(b) plans. You must withdraw it over time. Unfortunately, when you withdraw the money, the government gets to tax it. Remember that any money that you put into these accounts went in tax-free, before taxes. And, any money in an IRA can appreciate without any taxes on the appreciation until you withdraw the money.
- How much must you withdraw from your retirement account? The amount you are required to withdraw before the end of each year depends upon the amount in your IRA and your life expectancy. It is called the RMD or required minimum distribution. The total distribution can come out of one or more of your IRA accounts, if you have more than one. It does not have to come out of each one of them. But, the 401(k) and 457(b) distributions must come out of those accounts.
- Can you withdraw more than the required minimum distribution amount? Yes. You will be taxed on whatever amount you withdraw that was deposited pre-tax; it will be counted as part of your taxable income and taxed at your income tax rate. It will not count towards your RMD for the following year.
- Are there any retirement accounts not subject to the RMD? Any retirement accounts you have with after-tax contributions are not subject to the RMD and you are not required to withdraw money from them. This would include a Roth IRA, unless you inherited it.
- When must you take your first distribution? You are permitted to take your first distribution in the April of the calendar year following the year you turn 70.5. Put differently, you do not need to take a distribution in the calendar year you turn 70.5. But, you must then take another distribution by the end of that calendar year.
- What if you forget to take a distribution? If for any reason you forget to take a distribution when you are required to, do so as soon as possible and complete an IRS form explaining why you forgot. Unless the IRS accepts your explanation, you may have to pay a big penalty if you do not take a distribution when you are required to. That penalty can be as much as half of the amount you should have withdrawn.
- Must you spend the money you withdraw from your retirement account? You are not required to spend the money from your IRA after you withdraw it. You can reinvest it in a different taxable account if you do not need it, but not into a tax-deferred account. And, if you want to give the money in the IRA to a charity, you may distribute up to $100,000 from the IRA to the charity without paying any taxes on it.
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