When to Take IRA Distributions

One of the provisions of an individual retirement account is that you must eventually begin taking money out of the account. Since IRA money is sheltered from tax until you withdraw it, the Internal Revenue Service will not allow you to avoid tax on your IRA investments forever. These "required minimum distributions" stipulate the minimum amount that you can withdraw to satisfy IRS requirements. Taking at least the minimum amount is necessary to avoid steep IRS penalties.

  1. After Age 70 1/2

    • The line in the sand for the IRS regarding minimum distributions is age 70 1/2. Once you reach 70 1/2, the clock starts ticking and you only have a limited amount of time to take your first mandatory distribution. In most years, you have until December 31 to withdraw your minimum distribution, but for your first distribution only, you can wait until April 1 of the following year. If you choose to wait, you must take two distributions that year, one for the year in which you turn 70 1/2 and one for the following year.

    How Much To Take?

    • The amount of your required minimum distribution is not fixed, and it generally changes every year. Using data provided by the IRS, your distribution is essentially your account value divided by your life expectancy. The IRS uses different calculation tables depending on whether you are single or whether you have a spouse more than 10 years younger than you. For calculation purposes, your account value is your IRA value on December 31 of the year prior to your distribution year.

    Penalties

    • At 50 percent, the IRS penalty for "excess accumulations" is among the most severe that it can levy. If your required minimum distribution is $5,000 and you do not take it, you will owe a $2,500 penalty. This is in addition to the tax that you will owe when you finally do take your distribution, since the penalty renews annually until you take the required distribution. If you are in a high tax bracket, the taxes and penalties could eat up almost the entire amount of your distribution.

    Earlier Distributions

    • The IRS does not prevent you from taking IRA distributions before you turn 70 1/2, when they become mandatory. Rather, you can take IRA distributions whenever you need the money. You can take voluntary IRA distributions penalty-free between ages 59 1/2 and 70 1/2. Before 59 1/2, the IRS will term your withdrawal "premature" and assess a penalty tax of 10 percent. For all of your traditional IRA distributions, regardless of how old you are, you will owe regular income tax.

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