BOSTON (CBS) – Congress and the IRS decided that you could not leave your pre-tax retirement savings growing forever tax-deferred, so they chose 70½ for you to begin your mandatory withdrawals. Now I do not why Congress in its infinite wisdom chose the age 70½.

[Audio|titles=Age 70½|artists=Dee Lee]

These include your 401(k), 403(b), IRAs, SEP-IRAs, SIMPLE IRAs, Keogh plans and employee stock ownership plans known as ESOPs.

Your distributions must begin by your required beginning date (RBD), which is April 1 following the year that you reach age 70½.  According to the IRS, even if you have been receiving distributions before you reach age 70½, you must begin calculating and receiving required minimum distributions by your required beginning date.

For example, you reach age 70½ on August 20, 2011. For 2011, you are not required to take a required minimum distribution. Your first required minimum distribution would be in 2012, which you must receive by December 31, 2012.

But you will also have to take your 2012 distribution by December 31. Taking two mandatory distributions in one year could bump some of you to a higher tax bracket.

The mandatory amount you will need to withdraw though is really not very much. If you have a $100,000 in your IRA, your first year’s required distribution will be $3,925. It’s also a good idea to have taxes withheld for you so you don’t have to worry about paying estimated taxes.

The IRS requires that retirement plan owners be notified if they are subject to required minimum distributions and the custodians of your account will offer to calculate the amount you need to withdraw. That’s why they ask for your birth date on those applications.

The required minimum distribution is a simple formula but you need to include all of the dollars you have in all your retirement accounts. Therefore, if you have 10 IRA accounts you could get 10 letters from 10 different institutions. So consolidating all of your accounts before 70 is good planning.

It is key you begin to take the minimum withdrawals required from your retirement plans. There is a penalty if you do not. The penalty is 50% of the amount you should have withdrawn. So the IRS is serious about this!

As always, there are a few exceptions to the rule. If you have a Roth IRA you do not need to begin the required minimum distributions from your account at age 70½.  A Roth IRA allows you to leave those dollars in there. You can name a beneficiary and they will receive the dollars in the account upon your death and the bonus is your heirs will not owe income taxes on the dollars they receive.

One more thing: IRS worksheet for required minimum distributions.

Comments (2)
  1. I do like the manner in which you have framed this particular issue plus it does provide us some fodder for consideration. However, from what precisely I have observed, I simply just hope when other reviews pack on that people continue to be on issue and not embark upon a tirade of some other news du jour. Still, thank you for this outstanding point and although I can not necessarily agree with the idea in totality, I regard the viewpoint.

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