More than 3 million American baby boomers this year will attain an important milestone: three score years and 10. And while 70 may be the new 60, Uncle Sam says that 70 is still 70, and he wants to start taxing your retirement savings.
In exchange for the opportunity to delay income tax on retirement contributions, the IRS requires that retirement accounts be depleted and taxed over the expected lifetime of the account holder. It is critical that the required distribution be taken on time, since the penalty for failing to do so is a whopping 50 percent of the required amount. Yet the rules are not universally understood, and the calculation can seem somewhat opaque. Here is a brief tutorial.
Since a “qualified retirement account” carries a tax preference specifically designed to promote saving for retirement, it makes sense that taxes cannot be delayed indefinitely. According to the IRS code, the magic age is 70 1/2. That is, most investors must start taking a required minimum distribution (RMD) each year, beginning the year in which the investor turns 70 1/2. This is generally true of most qualified accounts such as IRA, 401(k), and 403(b) accounts. There is an exception for workers who are still employed and contributing to an employer-sponsored retirement plan; the date for their first required distribution is April 1 of the year after they retire.
Christopher A. HopkinsHolders of Roth IRA accounts are exempt from required distributions during their lifetime.
Retirees have an option to delay their first withdrawal. During the year in which the individual turns 70 , they may elect to delay the first distribution until April 1 of the following year. Thereafter, the RMD must be taken by December 31 each year. That means that if you choose to postpone the first payment, you must take two withdrawals the next year.