After you turn 70½ the IRS specifies that you begin taking a yearly IRA Minimum Distributions from your traditional IRAs. But what if you are still working or have other types of retirement accounts? Will you have to start removing money and pay more taxes?
Anyone who is over the age of 70½ is required to initiate the liquidation of their IRA, SEP-IRA, and Simple-IRA, regardless of employment status. Roth IRAs, on the other hand, are exempt from this rule and do not have any distribution requirement.
As an aside, the regulations on qualified retirement plans (e.g. 401k plans, 403b plans, profit sharing plans etc.), though, are somewhat more involved and beyond the scope of this article. However, if you are an employed participant in such a plan and over the age of 70½, you can delay the RMD until April 1 of the calendar year after you retire. That is as long as you do not own 5% or more of the business. This little known rule could however help you also defer distributions on your IRA as the following paragraph explains.
The government allows rollovers from IRAs to most employer-sponsored qualified plans. For example, IRS is okay with your moving your IRA into the 401k account at your employer. Note that even though IRA permits this, your employer plan may not accept outside contributions: ask the human resources department. Assuming you can do such a rollover, this means that if you are required to take RMD from your IRA and still work, you might be able to roll your account into your employer's plan. Then you could temporarily avoid taking required minimum distributions and paying the associated income tax until you retire. note that this requirement that you still be working is not detailed by IRS and therefore this author believes that if you're working as little as one hour per week you can defer your required minimum distributions until you retire completely.
To initiate your required minimum distribution, assuming you have more than one IRA, you need to decide which IRA to take the distribution from. The IRS does not care. The amount to distribute is based on your age and the tables can be found in the back of IRS Publication 590. You simply use the table to look up your age and find the accompanying factor. You divide the factor into your IRA balances as of December 31 of the prior year. So if your IRA balances were $130,000 at that time and your factor is 20, divide 130,000 by 20 to get $6500 for your required minimum distribution. You may distribute that $6,500 from one IRA or spread it amongst your IRAs. Be aware that while you can combine the balances of retirement plans of a similar type to determine your December 31 prior-year value, you cannot combine the balances of retirement plans of different types such as IRAs and 401(k)s.
Lose a Fortune on Your 401k Rollover
If you do not do any of these correctly:
- Opt for a distribution rather than direct transfer
- Rollover company stock to an IRA
- Choose to rollover to a Roth IRA
- Rollover to your new employer’s 401k
- Rollover post-tax contributions
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