You've spent years building up your
individual retirement account, whether by rolling
over employer plans when you change jobs or by
making regular IRA contributions. You've had plenty
of advice about making contributions along the
Once you're ready to start taking money out
of your IRA, the advice gets a lot more scarce. Except
with a Roth IRA, federal tax law requires you
to eventually take distributions. The penalty
for getting it wrong can be up to 50 percent of
the distribution you should have taken, so there's
a lot at stake here.
But most people want to delay taking distributions for as long as they possibly can. The overriding reason is simple: Unless your IRA is funded largely with after-tax contributions (and that is rarely the case), withdrawing money from it is very expensive. Every tax-deductible dollar you put in, and every tax-deferred dollar of earnings, comes out as ordinary income at your top marginal rate. Given the choice, it costs far less in tax dollars to spend down a taxable account -- largely tax-free principal with earnings taxed at the lower capital gains level -- than it does to pull money out of an IRA. So rule No. 1 is to minimize your IRA withdrawals.
This isn't news to Uncle Sam. The
government wants those tax dollars and typically
forces you to begin taking required minimum distributions,
or RMDs, starting at age 70½ -- or earlier,
in the case of inherited IRAs.
Do you always have to take the RMD?
Not every retirement account requires that you
take distributions beginning at age 70½.
Roth IRAs don't have any lifetime distribution
requirement at all. If you have a 401(k) with
your current employer, are working after age 70½,
and own less than 5 percent of the business, you
don't have to take required minimum distributions on that account (though
you must take them on your traditional IRAs).
However, in most cases -- including SEP IRAs,
SIMPLE plans and Keoghs -- you must begin taking
withdrawals at age 70½, even if you continue
to work and contribute to those plans.
If you inherit an IRA from someone
other than your spouse -- a parent, a sibling
or a life companion, for instance -- you must
begin taking distributions the year after the
original owner died. An IRA you inherit from your
spouse is treated as if it were your own, with
the usual rules applying, but nonspousal IRAs,
also called Beneficiary Designation Account IRAs,
or BDA-IRAs, have quirks, which we'll cover as
they come up.
When to take your RMD
You have to take your required minimum distribution each year, beginning
at age 70½. Your age is determined as of
Dec. 31 the year you take the withdrawal. For
your first required minimum distribution only, you have the option to wait
until April 1 (not April 15) of the following
year to take your first RMD, effectively doubling
up in that year. Whether to take advantage of
that one-time deferral depends on whether doubling
up the required minimum distributions and the attendant tax liability will
push you into a higher tax bracket, cause otherwise
tax-free Social Security payments to become taxable
or have other negative tax consequences. Most
people elect to get the one-time deferral.