The Basics of Required Minimum Distributions

January 16, 2015 // Bucket Strategy Investing

Most people who own IRAs are aware of the rules that accompany them. But for the uninitiated, here’s a quick primer:

In a traditional IRA, you put money in on an after-tax basis. That money in the IRA potentially grows over a period of years on a tax-deferred basis, meaning that you do not pay taxes on any of the potential accrued gains while it remains in the IRA. When you reach age 59 ½, you are then allowed to begin withdrawing your IRA money without penalty (but of course you must pay ordinary income taxes on any accrued gains when you take them out of the IRA).

Or, if your prefer, you can leave that money alone and let it potentially grow all the way until you reach age 70 ½, at which point you must begin taking required minimum distributions (RMDs) from your IRA. If you fail to take an RMD from your IRA, you risk owing a penalty calculated at 50% of the amount you should have taken out. The only exception is your first RMD, which can be taken as late as April 1 of the year after you turn age 70 ½.

The amount you are required to take out is based on a number of different factors, including the total amount of all your IRA balances as of the end of the prior calendar year. Thus, unlike with 401(k) or 403(b) plans (or similar), you are not required to take proportional amounts out of each IRA (although you can if you want to).

If you have a 401(k) or 403(b) plan, you might have the ability to delay taking withdrawals from these plans as long as you are still working and own less than 5% of the company. Of course your plan (and the IRS) must allow for the delay as well, so check with your financial advisor and/or plan administrator to see if you qualify for this delay.

There’s much more to RMDs than just taking money out of your IRA. Your entire retirement plan should include a strategy for RMDs that will help you to manage your taxes at retirement well before you hang up your cleats. Contact us for more information, or get a strategy that suits your needs.

Information presented should not be considered specific tax, legal, or investment advice. You should always seek counsel of the appropriate advisor, prior to making any investment decision. All investments are subject to risk, including the loss of principal. The opinions expressed in this content are subject to change without notice and may not come to pass.

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