After all the advice you’ve received about saving for retirement, taking money out of your traditional IRAs and other qualified retirement plans may feel strange. Yet once you reach age 70-1/2, the required minimum distribution (RMD) rules say you have to do just that.
Under these rules, you must withdraw at least a minimum amount from your retirement plans each year. Since the withdrawals are considered ordinary income, planning in advance can help you prepare for the impact on your tax return.
Here are a couple of suggestions:
*Make a list of your accounts. The rules require an RMD calculation for each plan. With traditional IRAs, including SEP and SIMPLE plans, you can take the total distribution from one or more accounts, in any amount you choose. You can also take more than the minimum.
However, withdrawals from different types of retirement plans can’t be combined. Say for example, you have one 401(k) and one IRA. You have to figure the RMD for each and take separate distributions.
Why is that important? Failing to take distributions, or taking less than is required, could result in a penalty of 50% of the shortfall.
*Plan your required beginning date. In general, you’re required to withdraw RMDs by December 31, starting in the year you turn 70-1/2. The rules provide one exception: You have the option of postponing your first withdrawal until April 1 of the of the following year.
Delaying income can be a sound move. But because you’ll still have to take your second distribution by December 31, you’ll receive two distributions in the same year, which can increase your taxes.
Contact your tax professional to discuss these and other RMD rules and create a sound distribution plan.