IRAs: Getting Your Money Out
BOSTON (CBS) – You can always get at your money in an IRA. But because the IRS and Congress allowed a deduction and a tax deferral, they will not be happy about it and will slap you with a 10% penalty plus taxes. If you wait until age 59½ you can get the money without the penalty but you will still owe the taxes.
But if you don’t need the money at 59½ you can leave it in the IRA hopefully still growing until you are 70½.
Minimum required distributions known as MRDs normally must begin at age 70½ for all of your IRAs except the Roth IRA.
If you are the owner of a traditional IRA, you must generally start receiving distributions from your IRA by April 1 of the year following the year in which you reach age 70½.
The distributions are based on your life expectancy using an IRS table, the Uniform Lifetime Table found in the IRS publication 590. You may be sure you’re going to live to be 110, but the IRS’s actuaries have different ideas.
Don’t mess with the minimum required distribution. If you are late in taking that first distribution, there is a 50% penalty on the amount of the required minimum distribution.
The IRS wants to begin to collect taxes from you that you were able to defer all those years while building your nest egg. If you are married and your spouse is more than ten years younger than you and he is the beneficiary on your IRA you would use the Joint Life Expectancy Table to calculate your distribution because the amount required to be withdrawn will be smaller.
Minimum Required Distribution has such an official scary title. But in reality it’s not a lot of money we are talking about having to withdraw. If you have $100,000 in your account and I use that number because it’s easy to do my calculations and you turned 70½ you would be required to withdraw less than $4,000. And each year they use a smaller multiplier to get to the MRD number.
The IRS requires that IRA owners be notified if they are subject to required minimum distributions and the custodians of your IRA will offer to calculate the amount you need to withdraw. That’s why they ask for your birth date on those applications.
If you have multiple IRAs, you must use the combined value to determine the minimum distribution. You need use only one account to withdraw funds from though.
But to make life easier, especially the bookkeeping part, consider consolidating your IRAs and your retirement plans into one account. Getting one monthly statement instead of 4 or 5 will definitely make life simpler.
Inherited IRAs take on whole other set of rules and are very complicated. Rules have changed and you may be able to take the distributions out based on your age rather than the original owner’s age.
If you need help in making your decision a trusted advisor is the only way to go. You may need to seek out a certified financial planner (CFP) or a CPA to help.
One more thing: From the IRS -
Top Ten Facts about Taking Early Distributions from Retirement Plans
If you took an early distribution from your retirement plan, here are some things you need to know:
1. Payments you receive from your Individual Retirement Arrangement before you reach age 59½ are generally considered early or premature distributions.
2. Early distributions are usually subject to an additional 10% tax.
3. Early distributions must also be reported to the IRS.
4. Distributions you rollover to another IRA or qualified retirement plan are not subject to the additional 10% tax. You must complete the rollover within 60 days after the day you received the distribution.
5. The amount you roll over is generally taxed when the new plan makes a distribution to you or your beneficiary.
6. If you made nondeductible contributions to an IRA and later take early distributions from that same IRA, the portion of the distribution attributable to those contributions is not taxed.
7. If you received an early distribution from a Roth IRA the distribution attributable to contributions is not taxed.
8. If you received a distribution from any other qualified retirement plan, generally the entire distribution is taxable unless you made after-tax employee contributions to the plan.
9. There are several exceptions to the additional 10% early distribution, such as when the distributions are used for purchase of a first home, certain medical and educational expenses or if you become disabled. Other exceptions can be found in IRS Publication 590, Individual Retirement Arrangements (IRAs).
10. More information about early distributions from retirement plans and the additional 10% tax can be found in IRS Publication 575, Pension and Annuity Income and Publication 590, Individual Retirement Arrangements (IRAs). Both publications are available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).