Finances at Four: Required Minimum Distributions

There’s a catch when you turn 70 and a half.

Before then, people put money in their 401(k)s and Individual Retirement Accounts without paying taxes on them. But after reaching 70 and a half years of age, Financial Adviser Carl Kielbasa, with Carroll Retirement Plans & Investments, says things become a little different.

You can’t keep the funds in these accounts indefinitely. At 70 and a half years old, you have to start withdrawing from the account.

Required Minimum Distributions

You can withdraw as much from the account as you want—but you can’t refuse to withdraw anything. The IRS has a required minimum you have to withdraw from your accounts every year called Required Minimum Distributions.

“When you turn 70 and a half, you have to start taking what are called Required Minimum Distributions,” he says. “That’s a distribution from your 401k or your IRA that you’re forced to take because the IRS wants to collect taxes on this money.”

If you don’t follow the rules, Kielbasa says there is a hefty penalty.

“There is quite a hefty penalty if you do not follow those rules and do not take out the Minimum Required Distribution,” Kielbasa says. “It’s actually a 50 percent penalty on what you’d have to take out. So to put that in numbers, (if) $4,000 is your required distribution (and) you don’t take that (out) you’re going to have to write a check to the IRS for $2,000 on top of that withdrawal; a pretty hefty fine.”

It’s fine to withdraw more than the required amount from the account, and it doesn’t matter when you withdraw during the year or how often, whether that’s once a year, every month or even daily. You just have to reach the minimum, which has to be calculated.

Do these rules apply to my retirement plan?

These minimum distribution rules apply to:

  • traditional IRAs
  • SEP IRAs
  • SIMPLE IRAs
  • 401(k) plans
  • 403(b) plans
  • 457(b) plans
  • profit sharing plans
  • other defined contribution plans

Plan for it

The best way to make sure this is done is to plan for it, Kielbasa says.

One of the biggest mistakes people make is forgetting to make withdrawals, regardless of whether they want to or not.

Setting reminders in calendars or consulting a financial adviser are all ways to make sure this task doesn’t fall to the wayside.

For more information on Required Minimum Distributions, head to the IRA’s website here, or contact Carroll Retirement Plans & Investments.

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