Mandatory IRA Withdrawals: If this is Your First Distribution, You Still Have Time to Take It Without Penalty

Jan 16, 2015 By Evan Nielsen In Taxation No Comment Tags : , , ,

In order to help individuals save money for retirement, the IRS offers tax advantages for Individual Retirement Accounts (IRA).  An IRA is not itself an investment. It’s basically a savings account with tax breaks. It’s a basket in which you can keep stocks, bonds, mutual funds, or other assets. The IRS allows you to delay the taxation on contributions to your IRA until you withdraw from the account at retirement. It’s not a tax-free account, though, so to prevent individuals from leaving money in their IRAs indefinitely to avoid taxation, the IRS requires you to make a minimum withdrawal from the account once a year once you reach a certain retirement age. This is called your annual required minimum distribution (RMD). You must take your first RMD once you turn 70 ½ years old. If you do not take the distribution on time, the IRS taxes you in an amount that is 50 percent of the RMD you should have taken.

When is the Deadline to Take My RMD?

Generally, you must take the RMD by December 31 of each year. There is an exception for the first year, though. The year you turn 70 ½, you have until April 1 of the next year to take the distribution. So, for those wanting to wait as long as possible before taking the RMD, July 1 is the most advantageous day of birth. For example:

  • If you turned 70 years old on June 30, 2014, you will become 70 ½ on December 30, 2014. You are required to take your first RMD by April 1, 2015.

 

  • If you turned 70 years old on July 1, 2014, you will become 70 ½ on January 1, 2015, making the date you must take your first withdrawal April 1, 2016.

How Do I Figure Out How Much Distribution I Have to Take?

The amount you are required to withdraw each year is generally calculated by taking your account balance at the end of the immediate year preceding calendar year and dividing it by a distribution period from the IRS’s Uniform Lifetime Table, which projects your life expectancy.

Although the IRS provides worksheets to assist you in making the calculation, your RMD is based on a number of factors, which can make the determination confusing and complex to calculate. The Nielsen Law Group has experienced professionals who can assist you in calculating your distribution. Call (480) 888-7111 or submit a web request here.