For Mark Roberts’ Use: After working hard and saving for retirement all of your life, you will most likely begin to take distributions from your retirement account once you retire from your career. But in some cases, you might prefer to leave your money in the account and allow it to grow, or you might even still be working well into your 60s. Whatever the reason, sometimes people don’t want to take distributions from their account just yet.
However, because retirement accounts are granted a special tax-deferred status, the government doesn’t want you to defer taxes on that money forever. Therefore, certain regulations on most retirement accounts enforce Required Minimum Distributions (RMD). This means that when you reach the age of 70 ½, you must begin taking a RMD each year. This withdrawal must be taken by April 1 of the year following the year in which you reach age 70 ½. Each year thereafter, you must take your RMD by December 31 of that year.
The amount of your RMD will depend upon your age, the value of the account, and your life expectancy (according to the IRS Uniform Lifetime Table). To calculate your RMD for any particular year, divide the account balance at the end of the previous year by the number of years you’re expected to live.
As you might have expected, yes there is a penalty for failing to take your Required Minimum Distribution. The IRS can impose a penalty of 50 percent on the amount that you failed to withdraw during the previous year.
Some employer-provided plans allow account owners to delay distributions beyond age 70 ½ if they are still working, but these scenarios are relatively rare. If in doubt, check with your plan administrator before making the decision to forgo distributions from your retirement account.
As always, plan carefully for your future tax burden when you begin taking distributions from your retirement account. These distributions are subject to ordinary income taxes. If you choose to wait until April 1 of the year after you reach age 70 ½ to take your first distribution, you will be required to take your second RMD by December 31 of that year. In many cases this strategy could push you into a higher-than-usual tax bracket, and backfire in the form of higher income taxes.
If you need help deciding upon the right time to take distributions from your retirement account, give us a call. We can review your income situation, and help you make the decision that best suits you.