Minimum required distributions are mandated for certain types of tax-deferred or tax-advantaged retirement accounts. If you are retired or you are getting older, it is important to understand the rules for required minimum distributions for your IRA so you don’t end up losing a portion of your hard-earned retirement savings to taxes, penalties and fees.
To make sure you know what you need to do to protect your investments and your retirement security, here are five facts about required minimum distributions for IRAs.
1. You Need to Start Taking Required Minimum Distributions at Age 70 ½
Starting in the calendar year when you turn 70 ½, you must begin to take money out of your IRA. This includes traditional IRAs, simple IRAs, SEP IRAs and Rollover IRAs. You also need to begin taking required minimum distributions from 401(K) and 403(B) plans at this same time.
However you are NOT required to begin taking required minimum distributions from a Roth IRA. There is never a requirement to take distributions from the Roth IRA during your lifetime. Taking distributions or withdrawals from a Roth IRA also will not satisfy the required distributions that you are mandated to take from your traditional, SEP, simple or rollover IRA.
2. Required Minimum Distributions Vary
The amount that you must withdrawal from your IRA varies from person-to-person. The required minimum distribution is generally calculated by dividing the adjusted market value of the tax deferred IRA account as of December 31 of the prior year by your applicable life expectancy factor. There is a Uniform Lifetime Table that lets you see your life expectancy factor that you must use when doing this calculation. It is also possible to use online calculators such as the MRD (minimum required distribution) calculator provided by Fidelity.com.
3. Required Minimum Distributions Are Taxed as Ordinary Income
When you take a mandated distribution from your IRA, the money that you take out is taxed as ordinary income during the tax year in which the withdrawal was made. This means you’ll pay income taxes based on your individual federal income tax rate that applies. If you live in a state that imposes an income tax, or if you have local taxes on income, you may also have to pay these taxes on IRA distributions as well.
4. The Required Minimum Distributions May Be Taken Throughout the Year
You can take all of the required minimum distributions periodically throughout the year, although you don’t have to do this and can instead opt to take a lump sum distribution instead. The total minimum distributions must be completed before the December 31 deadline in all cases though, with the exception of your first MRD. For your first required minimum distribution, you have until April 1of the year after the calendar year when you turn 70 ½.
5. The IRS Can Charge You a 50 Percent Penalty
If you do not take your required minimum distribution, the IRS may charge you a penalty equal to 50 percent of the total amount of the distribution that you did not take. In some cases, it is possible to file for an exemption from the penalty. However, it is usually a better choice not to take a chance on this hefty penalty and instead to take your distribution as required.
Minimum required distributions are mandated for certain types of tax-deferred or tax-advantaged retirement accounts. If you are retired or you are getting older, it is important to understand the rules for required minimum distributions for your IRA so you don’t end up losing a portion of your hard-earned retirement savings to taxes, penalties and fees.
To make sure you know what you need to do to protect your investments and your retirement security, here are five facts about required minimum distributions for IRAs.
1. You Need to Start Taking Required Minimum Distributions at Age 70 ½
Starting in the calendar year when you turn 70 ½, you must begin to take money out of your IRA. This includes traditional IRAs, simple IRAs, SEP IRAs and Rollover IRAs. You also need to begin taking required minimum distributions from 401(K) and 403(B) plans at this same time.
However you are NOT required to begin taking required minimum distributions from a Roth IRA. There is never a requirement to take distributions from the Roth IRA during your lifetime. Taking distributions or withdrawals from a Roth IRA also will not satisfy the required distributions that you are mandated to take from your traditional, SEP, simple or rollover IRA.
2. Required Minimum Distributions Vary
The amount that you must withdrawal from your IRA varies from person-to-person. The required minimum distribution is generally calculated by dividing the adjusted market value of the tax deferred IRA account as of December 31 of the prior year by your applicable life expectancy factor. There is a Uniform Lifetime Table that lets you see your life expectancy factor that you must use when doing this calculation. It is also possible to use online calculators such as the MRD (minimum required distribution) calculator provided by Fidelity.com.
3. Required Minimum Distributions Are Taxed as Ordinary Income
When you take a mandated distribution from your IRA, the money that you take out is taxed as ordinary income during the tax year in which the withdrawal was made. This means you’ll pay income taxes based on your individual federal income tax rate that applies. If you live in a state that imposes an income tax, or if you have local taxes on income, you may also have to pay these taxes on IRA distributions as well.
4. The Required Minimum Distributions May Be Taken Throughout the Year
You can take all of the required minimum distributions periodically throughout the year, although you don’t have to do this and can instead opt to take a lump sum distribution instead. The total minimum distributions must be completed before the December 31 deadline in all cases though, with the exception of your first MRD. For your first required minimum distribution, you have until April 1of the year after the calendar year when you turn 70 ½.
5. The IRS Can Charge You a 50 Percent Penalty
If you do not take your required minimum distribution, the IRS may charge you a penalty equal to 50 percent of the total amount of the distribution that you did not take. In some cases, it is possible to file for an exemption from the penalty. However, it is usually a better choice not to take a chance on this hefty penalty and instead to take your distribution as required.
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