Are You Affected by IRA Minimum Distributions?

Are You Affected by IRA Minimum Distributions

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One of the touted benefits of a traditional IRA or 401(k) is the fact that the funds placed in these accounts are not taxable until they are withdrawn. However, the federal government won't let that money go untaxed forever; the IRS requires that individuals must begin withdrawing a certain percentage of the money, and pay taxes on it, beginning at age 70. These withdrawals are called "required minimum distribution" (RMD) or "minimum required distribution" (MRD).

What Are Minimum Distributions?

By April 15th the year following when individuals reach age 70 they must withdraw their first minimum required distribution (MRD). It doesn't matter if they already began withdrawing money from the IRA beginning anywhere between age 59 and age 70. At age 70 tax rules require that an actuarial percentage based on the IRS life expectancy tables be withdrawn from the account and taxed as income in the current tax year. Basically, the IRS expectation is that all the retirement funds will be withdrawn and taxed during the individual's lifetime.

Obviously an individual is not required to spend the withdrawn funds; they can be reinvested or distributed however the individual desires. MRDs are simply a major tax issue. The penalty for failing to withdraw the MRD sometime during the tax year, or at least by April 15 of the following year when taxes are due, is 50% of the amount of the MRD not taken. That's a huge penalty that must be paid in additional tax.

Multiple IRA and 401(k) Accounts

The rules of MRDs are slightly different between IRAs and 401(k) accounts. If individuals own multiple traditional IRAs they are allowed to calculate the total MRD and withdraw that amount from one or more of the accounts however they please as long as the total amount is withdrawn.

However, if individuals have multiple 401(k) accounts, they are required to withdraw the MRD from each account separately. Also, individuals who are 70 or older and are still working are not required to take MRD from a 401(k) account with that employer.

Inherited IRA or 401(k)

Individuals who are younger than 70 who have inherited an IRA or 401(k) may need to make MRDs and pay the resulting federal income tax.

Rules concerning distributions from retirement accounts are very complex. Before making these decisions you should consult with an attorney who is experienced in estate and retirement matters.

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