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IRS Rules Make Retirement Plan Withdrawals Mandatory

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Do you own a traditional IRA, SEP-IRA, SIMPLE IRA, Keogh plan, 401(k) plan, or 403(b) plan? If so, you’ll have to start taking distributions when you reach age 70½. If you don’t, you’ll forfeit 50 percent of the amount you should have taken but did not.

The RMD rules apply to the plans mentioned above, but not to Roth IRAs.

Here are the requirements:

  • You may take your first distribution any time before April 1 of the year following the year in which you reached age 70½. However, a first distribution taken after the year you turned 70½ still will be credited to the year you actually reached the required age. You’ll then have to take another distribution by December 31 of the current year, forcing you to pay income tax on two distributions in the same year.
  • You must take each subsequent distribution by December 31 of the applicable year. To avoid the 50% penalty, give your plan administrator enough time to process the distribution and get it to you by year-end.
  • The amount of your RMD is computed using Uniform Lifetime Tables issued by the IRS. These tables provide percentages that are applied to the value of your retirement account as of December 31 of the year preceding your distribution.
  • If you’re still employed at age 70½, you may be able to delay withdrawing from your current employer’s plan until you actually retire.
  • You and your spouse may not take distributions from one another’s accounts to make up your RMDs. However, if you individually own more than one IRA, you may compute a combined RMD and withdraw it from one or any combination of the accounts. RMDs from non-IRA plans, such as Keogh or 401(k) plans, must be computed for and withdrawn from each separate account.
  • You may take distributions in monthly, quarterly, semi-annual, annual, or irregular increments, as long as you reach your required total each year.
  • Since RMDs are taxable, consider making quarterly income tax estimates to cover your liability, or instruct your administrator to withhold taxes from each distribution.

Financial institutions must either inform retirement account owners about their required distribution amount, or they must offer to calculate it upon the owner’s request. Banks, brokers, and other custodians must also inform individuals about the deadline for taking their minimum withdrawals.

Financial institutions must report your name to the IRS if you’re required to take a distribution. This will alert the IRS if a distribution fails to show up on your tax return.

Complexity remains:

Current rules make calculating your distributions simpler, but retirement plan rules remain complex, and they differ for each type of retirement plan. For additional help regarding retirement plan withdrawals, contact any member of the Baker Holtz staff at (616)458-1835.

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