In an ideal world, you'd be so well situated and so busy spending money from other sources that you'd never need to touch your individual retirement account (IRA) and it would grow tax free forever.
The notion that this could be
true for some wealthy people so bothered Congress
that it passed a mandatory distribution law
which requires that when you reach 70½ you must start withdrawing money from your
traditional IRA and begin paying taxes on
Of course, Roth IRAs came around
later with different sets of rules, such as
tax-free distributions with no deadline at
all for tapping them.
But how much and when you must withdraw from traditional IRAs is spelled out by the Internal Revenue Service. Reading these rules will give you a headache, but if you're planning your retirement or if you're approaching the magic age, better put on your glasses and read both IRS Publication 575, Pension and Annuity Income, and IRS Publication 590, Individual Retirement Arrangements.
Don't let confusion or inertia
stop you from figuring out this issue or getting
some help from a financial adviser if you
can't manage on your own. The penalties for
getting it wrong are huge -- take out too
little or do it too late and the IRS will
levy a 50 percent penalty in addition to insisting
that you cough up the correct amount. Ouch!
While IRS instruction sheets
are truly the best way to get the specific
directions on your own, here's some initial
advice the IRS doesn't offer that could make
taking mandatory distributions easier. If
this information seems arcane, take comfort
from the fact that William Hood, a professor
of accounting at Central Michigan University
as well as a CPA private practitioner, says
the rules that govern minimum required distributions
from IRAs are among the most complicated in
our tax code.
Most of the information here
comes from Hood; Sue Stevens, Morningstar's
director of financial planning and president
of Chicago-based Stevens Portfolio Design;
and CPA Ed Slott, publisher and editor of
Ed Slott's IRA Advisor.
|Paying the tax man