When Must I Begin Taking Distributions From My Traditional IRA?
An Individual Retirement Account (IRA) is a long-term savings vehicle designed to help you grow your assets for your retirement. While there are different types of IRAs, the traditional IRA is the most common. The Internal Revenue Service (IRS) has created extensive rules on when distributions are allowed, and when they are required. You should research these thoroughly, or enlist the aid of a financial or tax adviser, before you open an account.
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Mandatory Distributions
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Contributions and earnings within a traditional IRA grow tax-deferred until they are distributed. However, ultimately funds must be withdrawn from an IRA, as the IRS will not allow assets to grow untaxed to perpetuity. As the owner of an IRA, you are required to begin taking distributions from your IRA by April 1 following the year you turn 70 1/2 years old. If you wait until April 1 to take your first distribution, you must take your next distribution before Dec. 31st of the same year. After this point, distributions must be taken at least annually.
Allowed Distributions
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Although you are required to begin taking distributions when you reach 70 1/2, you are allowed to take a distribution (without penalty) as soon as you turn 59 1/2. Taking an allowable distribution does not obligate you to continue taking distributions. In other words, if you take a distribution at age 60, you are still not required to take another one until you reach 70 1/2.
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Penalties
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If you neglect to take a mandatory distribution, the IRS levies a severe excise tax of 50 percent on the amount not distributed, and amount which must be paid every year that withdrawals are not made. You also cannot take a withdrawal too early without paying a penalty. For withdrawals before the age of 59 1/2, the IRS exacts an early withdrawal penalty tax of 10 percent of the amount withdrawn. Certain states also levy their own tax penalties. Note that there are exceptions to the 10 percent penalty rule, including withdrawals for the first-time purchase of a home (up to $10,000), or those due to disability or used for higher education expenses.
Amount of Required Distributions
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The IRS provides three tables to calculate the amount of your required minimum distribution. Generally speaking, the amount of the distribution approximates the total value of your account divided by your estimated life expectancy. Table One is the single-life expectancy table, and is primarily used by non-spouse beneficiaries of an IRA account. Table Two is the joint life and last survivor expectancy table, and it is used if you are the IRA owner, and your wife is more than 10 years younger than you and the sole beneficiary of the account. Table Three is the universal lifetime expectancy table, and is used if your spouse is the sole beneficiary of your account and is not more than 10 years younger than you.
Taxation of Distributions
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Except in rare instances, such as charitable contributions, all distributions from a traditional IRA account are fully taxable at ordinary income tax rates. Even if the complete account is composed of capital gains, the amounts withdrawn are treated as ordinary income and should be listed on Line 15 of your Form 1040 when you file your taxes.
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