Tax guide

Tapping Retirement Accounts

How do I Use funds from an IRA without penalty?

Unless you elect otherwise, benefits of your qualified plan have to be available within 60 days after the close of the latest plan year in which any one of the following happens:

  • You turn 65 (or the plan’s normal retirement age, if that’s earlier)
  • You complete 10 years of plan participation
  • You terminate service with the employer

For example, if you mark 10 years in your traditional IRA in October of 2020, you can start taking distributions sometime in the first two months of 2021, as allowed by your plan administrator.

You can also start taking distributions from your plan after what is termed “a distributable event.” What constitutes a distributable event can vary from plan to plan. Consult your plan documents; they must clearly state when a distribution can be made.

Can I take a distribution from funds I contributed?

In terms of distributions, there’s your money, and there’s the money contributed by your employer.

The plan may permit a distribution of the employee elective deferrals – your money – when you terminate employment (either by retirement, severance, death or disability), when you reach age 59½, or suffer a hardship or another event that’s specified as a distributable event in the plan.

A distribution of the employer contributions may be permitted when you terminate employment, reach the age specified in the plan (this can be any age), or experience a hardship or distributable event.

In the case of SEP or SIMPLE IRA plans, since these plans use IRAs to hold participants’ retirement savings, money can be withdrawn from the IRA at any time. But: a 10% penalty generally applies if you withdraw funds before reaching age 59½.

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What are Required Minimum Distributions (RMDs)?

Whether an IRA or 401(k) or similar plan, you’re not allowed to keep retirement funds in your account indefinitely without taking some sort of distribution. You generally have to start taking withdrawals from your IRA or retirement plan account when you reach age 72. (Age raised from 70 ½ to 72 when the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law in December 2019.) Roth IRAs do not require withdrawals until after the death of the owner.

In most other cases, though, the IRS says a required minimum distribution (RMD) must be taken from the account each year. You can withdraw more than the minimum required amount. If the account is a standard IRA (not a Roth) remember that these funds were tax-deferred, and your distribution will be included in your taxable income.

How do I calculate my RMD?

To calculate your RMD, divide the account balance (as of the end of the immediately preceding calendar year) by a distribution period found on the IRS Uniform Lifetime Table. The IRS also has worksheets to help with your calculations.

When do I have to take an RMD?

Note: The CARES Act temporarily waives RMDs for calendar year 2020 for all types of retirement plans. This includes a first RMD payment for 2019 that could have been delayed until April 1, 2020. Anyone who already took a required minimum distribution (RMD) in 2020 from certain retirement accounts now has the opportunity to roll those funds back into a retirement account following this CARES Act RMD waiver.

In a typical year, you must take your first required minimum distribution for the year in which you turn age 72 (70 ½ if you reach 70 ½ before January 1, 2020) if you have IRAs, including SEP and SIMPLE IRAs.

If you reach 70 ½ in 2020, you’ll take your first RMD by April 1 of the year after you reach the age of 72. The age was raised to 72 by the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was signed into law in December 2019.

If your plan is a 401(k), 403(b) or another defined contribution plan, the requirements are the same, but some plans allow you to use your retirement date instead of the age 72 milestone.

Once you’ve received the first RMD, you’re required to withdraw subsequent minimum distributions by December 31.

In order to avoid having two minimum distributions subject to tax in the same tax year, you can make your first RMD by December 31 the same year you turn 72, instead of waiting until April the following year.

The threat backing up the RMD is a hefty excise tax. If you don’t take the RMD – or if your distribution isn’t large enough – you may have to pay a 50% excise tax on the amount not distributed as required.

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