Dear Savvy Senior,
Can you give me the details on required IRA and 401(k) distributions? I turned 70 this year, and want to be clear on what I’m required to do and when I’ll have to do it.
The old saying “you can’t take it with you” is definitely true when it comes to Uncle Sam and your tax-deferred retirement accounts. Here’s what you should know about required retirement account distributions along with some tips to help you avoid extra taxes and penalties.
Beginning at age 70½, the IRS requires all seniors that own tax-deferred retirement accounts—like traditional IRAs, SEP IRAs, SIMPLE IRAs, SARSEPs, 401(k)s, 403(b)s and 457s—must start taking annual required minimum distributions (RMDs), and pay taxes on those withdrawals. The reason: The IRS doesn’t want you hoarding your money in these accounts forever. They want their cut. Distributions are taxed as income at your ordinary income tax rate.
There are, however, two exceptions. Owners of Roth IRAs are not required to take a distribution, unless the Roth is inherited. And if you continue to work beyond age 70½, and you don’t own 5 percent or more of the company you work for, you can delay withdrawals from your employer’s retirement plan until after you retire. But if you have other non-work-related accounts, such as a traditional IRA or a 401(k) from a previous employer, you are still required to take RMDs from them after age 70½, even if you’re still working.
Generally, you must take your distribution every year by Dec. 31. First timers, however, can choose to delay taking their distribution until April 1 of the year following the year you turn 70½. So, for example, if your 70th birthday was in March 2015, you would turn 70½ in September and your required beginning date would be April 1, 2016. But if your 70th birthday occurred later in the year, say in August, you wouldn’t turn 70½ until 2016. In that case, you would be required to take your first distribution by April 1, 2017.
But be careful about delaying, because if you delay your first distribution, it may push you into a higher tax bracket because you must take your next distribution by Dec. 31 of the same year.
Also note that you can always withdraw more than the required amount, but if you don’t take out the minimum, you’ll be hit with a 50 percent penalty on the amount that you failed to withdraw, along with the income tax you owe on it.
Your RMD is calculated by dividing your tax-deferred retirement account balance as of Dec. 31 of the previous year, by an IRS estimate of your life expectancy. A special rule applies if your spouse is the beneficiary and is more than 10 years younger than you.
IRA withdrawals must be calculated for each IRA you own, but you can withdraw the money from any IRA or combination of IRAs. 403(b) accounts also allow you to total the RMDs and take them from any account or combination of accounts.
With 401(k) plans, however, you must calculate the RMD for each plan and withdraw the appropriate amount from each account.
To calculate the size of your RMD, you can use the worksheets on the IRS website—see irs.gov/Retirement-Plans and click on “Required Minimum Distributions.” Or contact your IRA custodian or retirement-plan administrator who can do the calculations for you.
For more information, call the IRS at 800-829-3676 and ask them to mail you a free copy of the “Distributions from Individual Retirement Arrangements” (publication 590-B), or see irs.gov/pub/irs-pdf/p590b.pdf.
Send your senior questions to: Savvy Senior, P.O. Box 5443, Norman, OK 73070, or visit SavvySenior.org. Jim Miller is a contributor to the NBC Today show and author of “The Savvy Senior” book.