What you must take from nest egg when you turn 70½
TERRY SAVAGE email@example.com October 12, 2011 6:02PM
Updated: May 3, 2013 12:15PM
Q. I just reached age 70 earlier this year, and now I have to take distributions from my IRAs. But I don’t know how much I must take out, or where I should take the money from. Help!
A. Welcome to the world of “Required Minimum Distributions” (RMDs). This is the government’s chance to collect taxes on all that tax-deferred growth in your retirement accounts over the years. And there is no way to avoid it — unless you saved in an after-tax Roth IRA or Roth 40l(k), or converted your traditional IRA to a Roth at some time in the past, paying taxes at that time.
All other retirement accounts — 40l(k), 457, 403(B), and traditional or rollover IRAs — are subject to RMDs that are added on to your current income to determine the amount of taxes you will pay. In some cases, this will push you into a higher tax bracket — and may even impact your eligibility for certain benefit programs or increase the cost of your Medicare Part B premiums.
And if you don’t withdraw the appropriate amount each year, you are subject to a huge penalty — a 50 percent excise tax on the amount not distributed for each year you fail to make the required minimum distribution.
You must start receiving distributions from your IRA by April 1 of the year following the year in which you reach age 70½. You didn’t tell me your birthday, but if you reached 70½ this year, you have a choice. You can take your first distribution this calendar year, and next year’s distribution next year. This avoids having two big taxable distributions in year.
How much, and from where?
The real issue is keeping track of all your accounts, so you can figure out how much you’re required to withdraw. Mutual fund companies recognize this coming boomer dilemma. Fidelity has a new Retirement Distribution Center to help clients with this task.
You figure out the amount of the required distribution by adding up the account balances in all your IRAs as of Dec. 31 of the year preceding the year for which the distribution is made. So, if you’re withdrawing now, you use last year’s year-end account balances. (If you made a contribution during the year, this year, it is not counted for this year’s required distribution.)
The IRS created a table to figure out your required distribution, based on your age. Unless you have a spousal beneficiary more than 10 years younger than you are, you’ll generally use IRS Table III, (Uniform Lifetime) in Appendix C to figure out the amount you must distribute, starting at age 70½.
You can find this table online at Bankrate.com by searching for “IRA Minimum Distribution Table.” (www.bankrate.com/finance/money-guides/ira-minimum-distributions-table.aspx)
If you are looking for a round number “guestimate” of your RMD, use the quick calculator at Kiplinger.com under the topic “IRA Distributions”: www.kiplinger.com/php/ira/question.htm
If you have multiple retirement accounts with different custodians, it is very important to base this distribution on the total of all account balances. The distribution, however, can be taken from any one, or several accounts — as long as you take out enough to fulfill the RMD.
Be sure to keep your year-end statements from all accounts, in order to determine this RMD. And file those documents with your tax return in case you are ever challenged.
You’ve spent all your life saving for retirement, and now the government wants its share. They don’t make it easy. That’s the Savage Truth.
Terry Savage is the Chicago Sun-Times nationally syndicated financial columnist, and a registered investment adviser. Post personal finance questions on her blog at www.TerrySavage.com and blogs.suntimes.com/savage.