Tax guide

Tapping Retirement Accounts

When withdrawing funds from an IRA, there’s a right way and a wrong way. Actually, according to the IRS, there’s more than one wrong way.

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 2019, you can start taking distributions sometime in the first two months of 2020, 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.

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the case of SEP or SIMPLE IRA plans, since these plans use IRAs to hold participants’ retirement savings, money can be withdrawn from the IRA at any time.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

Required Minimum Distributions

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 70½. 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.

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.

Not If But When

For IRAs, including SEP and SIMPLE IRAs, you must take your first required minimum distribution by April 1 of the year after you reach age 70½. So if you reach 70½ on March 1, 2020, you’ll have to take the distribution by April 1, 2021.

If your plan is a 401(k), 403(b) or another defined contribution plan, the requirements are the same, but with the option to use your retirement date instead of the age 70½ 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 70½, 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 percent excise tax on the amount not distributed as required.

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