Required Minimum Withdrawal for an IRA
You spend your entire working life putting money aside in your IRA, but how you take that money out can be just as important. When it comes to your IRA accounts, the two magic ages are 59 1/2 and 70 1/2. When you pass 59 1/2, you can start to withdraw your IRA money without penalty, and when you reach age 70 1/2, you must start taking the money.
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Age 70 1/2
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You can start taking money out of your IRA without penalty when you reach age 59 1/2. But after you reach the age of 70 1/2, you are required to begin taking distributions from your account. If you fail to take the required minimum distribution (RMD) from your IRA account, you face a stiff 50 percent penalty on the money you should have taken out.
Roth Exemption
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The required minimum distribution provision applies only to traditional IRAs, which are taxed as ordinary income when you withdraw the money. If you hold a Roth IRA instead, you are not required to take any distributions if you do not need the money. You are free to take as much, or as little, from your account as you need. You can even pass the money in your Roth IRA on to your heirs as part of your estate if you wish.
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IRS Formula
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The IRS uses a special formula to determine the required minimum distribution you must take from your IRA starting at age 70 1/2. Since this formula includes the balance in your account, the number will be different for every investor. You can use your tax preparation software to calculate your RMD, or check with your certified public accountants.
Tax Planning
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If you are approaching age 70 1/2, it is helpful to do some advance tax planning and start thinking about how your required minimum contributions will fit into your overall retirement planning. You can use your tax software to calculate how much you need to take out, based on the balance of your account and your age. Once you have that number in hand, you can start to plan your other retirement plan distributions in a way that will minimize your tax bill without impacting your lifestyle. If you have a Roth IRA, for instance, you could use that tax-free money to supplement your RMD, thereby reducing your taxes while still giving you the money you need to live your desired lifestyle.
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