Mandatory
Minimum Distributions
To help you save for retirement, Congress
has created a number of savings methods for
you to postpone paying taxes on your
contributions and accumulated savings until
you withdraw the money. But for most types
of accounts, this generosity doesn't last
forever. Eventually, the rules require you
to begin withdrawing your retirement savings
and paying taxes on the withdrawals.
Investors with traditional IRAs must begin
taking the minimum distribution amount after
turning 70 1/2 (Roth IRAs are exempt from
this rule). In the year you reach the age
of 70 1/2, you must take a required minimum
distribution. The first required minimum
distribution can be taken anytime during
that year but must be taken no later than
April 1 of the following year. Each
subsequent year, your required minimum
distribution must be taken by December 31.
If the minimum distribution is not taken,
you may incur a penalty.
The same rules generally apply for qualified
employer retirement plans such as 401(k)s,
403(b)s, profit sharing and Keogh plans.
However, if you are over the age of 70 1/2,
still working and do not own 5% of more of
the business, the required minimum
distribution from your employer's plan can
be delayed until you retire.
SEP-IRAs and SIMPLE-IRAs follow IRA minimum
distribution rules, so you must begin
minimum distributions at the age of 70 1/2
with these types of retirement plans, even
if you are still working.
Keep in mind, if you reach or have reached
the age of 70 1/2 in 2003 and plan to take
your first minimum distribution between Jan
1 and April 1, 2204, you will be required to
take two distributions in 2004 - the first
by April 1 and the second by Dec 31.
Don't forget that you will owe taxes on your
distributions. You may want to keep this in
mind when determining when to take your
first minimum distributions.
Once you are over the age of 70 1/2, you are
required to take and IRA minimum
distribution every year. If you fail to
take the minimum amount, you may incur an
"excess accumulation penalty," which is 50%
of the amount that should have been with
drawn. That means if your required minimum
distribution this year is $8,000 and you
don't take it by Dec 31 or April 1 if it's
your first distribution, you'll end up
paying a penalty of $4,000. The penalty is
in addition to the income taxes you will owe
on the withdrawal.
If you have more than one retirement
account, each account will have its own
required minimum distribution amount. The
total of the minimum distributions must be
taken, but you have some flexibility in how
that money is distributed. |
