| You can't take it with you, and that definitely
pleases the Internal Revenue Service. But the tax collector
doesn't want you to leave a lot of your money to heirs,
either. So it makes some senior citizens dip into their
nest eggs each year under threat of additional taxation.
And the IRS wants these
taxpayers to lighten their retirement reserves soon.
April 1, to be exact.
If you turned 70½ last year and
haven't yet started spending what Uncle Sam thinks you
should, on April 1 you have to take an IRS-specified
amount out of your retirement account, even if you're
This withdrawal, known as a required minimum
distribution, must come out of retirement savings where
taxes have been deferred. This includes several popular
IRAs -- traditional, simplified employee pension, or
SEP, and SIMPLE accounts -- as well as certain employer-sponsored
It's no secret why the IRS wants you to
start drawing down these accounts. Your money has been
sitting there for years, tantalizingly out of reach
of the tax collector as it accrued tax-deferred earnings.
You don't care what the rules are. You don't need the
money, you don't want to pay taxes on any withdrawals,
and you're leaving your account untouched. Not a good
The IRS will hit you with an excess accumulation
tax. This levy is 50 percent of the required distribution
that you didn't take. For example, you didn't withdraw
the required $1,000 from your traditional IRA. The tax
charge for your defiance is $500. For a taxpayer in
the 25-percent income tax bracket, that's twice what
you would have paid in taxes if you'd simply followed
the distribution rule.
If you can convince the IRS that your
distribution shortfall was due to "reasonable error"
and that you're taking steps to rectify the situation,
the agency could waive the penalty. In that case, file
Form 5329, go ahead and pay the excess accumulation
tax, and attach a letter of explanation. If the IRS
agrees that you shouldn't be penalized, it will refund
the excess tax.
OK, you've accepted that you must start siphoning off
your retirement fund. Just how much do you have to withdraw?
The IRS has created three tables based
on life expectancies to figure the minimum withdrawal
amount, which is a percentage of your IRA based on your
- Retirement-plan beneficiaries use the
- Married account owners with spouses
more than 10 years younger use the second table. Since
its calculations incorporate the younger age of the
spouse to spread withdrawals over a longer life expectancy,
you don't have to take out as much.
- Most account holders use table three,
known as the Uniform
Lifetime Table. It is for singles and married
savers with spouses closer to their own ages.