Required Distributions From Retirement Accounts

Eventually, you or your beneficiaries must take money out of your retirement accounts--and pay tax on it.

If you save and invest wisely, you can leave a substantial amount in an individual retirement account—but eventually you, or your beneficiaries, will have to start taking money out. And you (or your beneficiaries) will be in for severe financial penalties if you violate the rules.

When Withdrawals Must Begin

The ideal scenario, in the eyes of the IRS, would be to have you exhaust the money in your retirement account at precisely the moment you breathe your last. That's why the IRS makes you start withdrawing money in your 70s, and why the amount of these required minimum distributions is tied to your statistical life expectancy.

Traditional IRAs. Distributions become mandatory the year you turn age 70½. (The rules already sound confusing, don't they?) The IRS bases everything on calendar years. You must make one whole year's withdrawal for the calendar year in which you turn 70½. This first year, however, you get a bit of extra time before you actually have to take out the money: You have until April 1 of the following year to make the withdrawal. After that, the deadline is always December 31.

EXAMPLE: Robert turns 70½ on November 30, 2010. He must make a full year's required minimum distribution for 2010, but he has until April 1, 2011, to do it. He must take 2011's required minimum distribution by December 31, 2011.

Roth IRAs. There are no required distributions from Roth IRAs. As a result, a Roth IRA could contain a much larger amount at your death than a comparable traditional IRA or 401(k)—and pass that larger amount on without probate.

401(k) accounts. You don't have to withdraw money from your 401(k) until you turn 70½ or you actually retire, whichever is later. (There's one exception: If you're self-employed, you must begin withdrawals at 70½.) If you retire after you are 70½, then April 1 of the following year is the date by which you must make your first required distribution.

Calculating the Required Minimum Distribution

The minimum amount you must withdraw is based on your life expectancy and that of a beneficiary. The IRS provides a table on which you can look up this "joint life expectancy"; then you simply divide the amount in your account by this number and take out the result.

EXAMPLE: Valerie is 75; the IRS Uniform Distribution Period Table gives her a figure of 13.4 years. The balance in her IRA at the end of the previous calendar year was $50,000, so this year she must withdraw $2,294.

Whether or not you actually name a beneficiary, the IRS table assumes that your beneficiary is ten years younger than you are. You don't need to consider the beneficiary's actual age unless the beneficiary is your spouse and is in fact more than ten years younger than you. In that case, you can reduce the amount you must withdraw by using a different IRS table that factors in your spouse's actual age.

EXAMPLE 1: Jason turns 70½ on February 23. That means by April 1 of the next calendar year, he must have made a year's worth of withdrawals from his IRA account. His wife Molly, the beneficiary of the IRA, is four years younger than he is. The minimum amount he must withdraw is determined by the IRS Uniform Distribution Table. The table assumes that Molly is ten years younger than Jason, which works to their benefit—the minimum amounts Jason must withdraw each year will be smaller than if Molly's actual life expectancy were used.

EXAMPLE 2: Mark names his wife Rita, who is 12 years his junior, as his IRA beneficiary. To calculate his required minimum distribution, he uses the IRS table that calculates his and Rita's joint life expectancy based on their actual ages.

Why You Don't Want to Miss a Required Distribution

If you don't make the legally required withdrawal, you will forfeit half of the amount you should have withdrawn but didn't. That's right: There's a full 50% tax on the money you shouldn't have left in the account.

EXAMPLE: When Mae is required to begin taking money from her IRA, she dutifully makes a withdrawal—but mistakenly takes out $1,000 less than she should. The next year, when she files her income tax return, she must pay a $500 extra tax (and file an extra form) on the $1,000 she should have withdrawn.

Retirement Account Withdrawal Rules: A Summary

Your Age

Withdrawal Rules

Younger than 59½

"Premature" withdrawals

Traditional IRAs: Withdrawals are subject to a 10% penalty, unless you become disabled and cannot work, you die, you use the money to buy your first house, or you set up a plan to make regular, equal withdrawals over your life. You cannot borrow from an IRA.

Roth IRAs: Withdrawals of contributions are always tax free. Qualified withdrawals of earnings are penalty and tax free if you've had the account for at least five years and you are disabled or are using the money to buy your first house (up to $10,000).

401(k) plans: You can borrow from your 401(k), but cannot withdraw money from it except for an IRS-recognized hardship, such as to pay medical bills, prevent eviction or foreclosure, pay college tuition, or make a down payment on your primary residence. And you still must pay the 10% penalty on early withdrawals. There is one important exception: If you're 55 or older and actually retired, you may make penalty-free withdrawals.

59½ to 70½

"Ordinary" withdrawals

Withdrawals are optional.

Traditional IRAs: The amount is included in your gross income for income tax purposes.

Roth IRAs: Withdrawals of contributions and of qualified earnings are not taxed.

70½ or older

"Required" distributions

Traditional IRAs and 401(k)s: Withdrawals are required. The minimum amount is determined by your age.

Roth IRAs: Withdrawals are optional.

More information

IRAs, 401(k)s & Other Retirement Plans, by Twila Slesnick and John C. Suttle (Nolo). A thorough discussion of the rules that govern withdrawals from the most common kinds of retirement plans.

The website contains news, articles, calculators, links, and much more, all dealing with various aspects of the Roth IRA.

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