When you reach age 70½, the Internal Revenue Service (IRS) requires you to start withdrawing money from your retirement savings plan(s). These required withdrawals, also known as MRDs, must begin on April 1st of the calendar year following the year in which you turn 70½ or retirement from employment-whichever occurs later.
After that, you must receive an MRD by the end of each calendar year until your entire plan balance has been paid out. For example, if you reach age 70½ and leave employment in 2013, you must receive your first MRD by April 1, 2014, to satisfy the requirement for 2013. Further, you must receive a second MRD by December 31, 2014, to satisfy the requirement for 2014, by December 31, 2015, to satisfy the requirement for 2015, and so on. All subsequent MRDs must be received by December 31 of the year. Note: You cannot suspend MRD payments once they have begun, even if you return to work.
What is the minimum? Your MRD is determined by dividing the adjusted market value of your tax-deferred retirement account as of December 31 of the prior year, by an applicable IRS life expectancy factor taken from one of the tables in IRS Publication 590.
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There are no required distributions on Roth IRA accounts. If you don't need the money, you will never have to touch your Roth.
The penalty for not taking your MRD is severe: If you don't receive a distribution that satisfies the requirements, you must pay the IRS an additional nondeductible 50 percent tax on the amount that you should have received.
Next month: Tax tips for retirees.
For more information on tax deferred retirement plans and understanding the tax implications on your retirement, contact us a 206-522-0110 for a consultation.