TRAVERSE CITY — As the year draws to a close, I’m often asked by those who have reached age 70 about their need to start taking money out of their individual retirement accounts (IRAs). Here’s a quick lesson on the current retirement account distribution rules.
The minimum amount you must withdraw annually from your IRA is based on your life expectancy. Every year you have to withdraw an ever larger percentage of your retirement accounts. The required minimum percentage is figured using your IRA account balances from the end of the previous year. Basically, the older you get the more the IRS plans to squeeze out of your IRA accounts and the more that spills onto your tax return.
Think of the IRS as a troll that guards the crossing that separates your retirement accounts funded with pre-tax money from your regular accounts. The rules force retirees to annually lug a bag of money over that crossing and the IRS collects its toll.
Technically, you have to begin taking what’s known as a “required minimum distribution” from your IRA accounts by April 1 of the calendar year following the year you hit age 70 ½. However, most people decide to take their first distribution in the same calendar year they actually reach age 70 ½. Why? If you choose to wait until the deadline, you also have to take your next withdrawal by the end of that same calendar year. This doubling up of distributions in one tax year could push you into a higher tax bracket and result in a bigger tax bite.
Also, it is very important for you to consider all of your retirement accounts when figuring your distribution amount. While you are allowed to meet your required distribution by drawing from just one of your IRAs, you must satisfy the minimum amount based on the total value of all of your IRAs. If you accidentally forget an account, you’ll face penalties of 50 percent of your minimum distribution shortfall. That’s a pound of flesh for what seems like an innocent mistake!