The required minimum IRA distribution, also known as RMD, is not fully comprehended by all regarding retirement funds. When are you supposed to execute your minimum IRA distribution? And also, what amount do you withdraw? These questions are to be aptly asked so as to get some comprehension about the retirement plans and why is it important to take minimum IRA distributions.
First and foremost, it should be known that the required minimum distribution is an essential component of conventional 401k and IRA retirement accounts. Having the requirement to take distributions is the manner in which IRS has you report these amounts on your tax return and pay tax on them. Both traditional 401k accounts and IRA allow workers to set aside pre-tax money and defer the payment of taxes until retirement, when it is assumed that most people's earnings will have dropped enough to qualify them for lower IRA tax brackets.
The sole reason behind this policy (tax deductions on contributions) was to persuade employees to keep some money for their retirement rather than depending on diminishing corporate pensions and Social Security. But, it should be borne in mind that such tax-benefited retirement accounts were not intended by Congress to be a total escape from taxation. In order to collect the intended taxes, the US government requires participants in traditional 401k accounts and IRAs to regularly withdraw money upon reaching a certain age.
Rather than force the distribution of your accumulated retirement accounts in one lump sum, the IRS minimum IRA distribution rules require that you take a small amount each year over your life expectancy starting at age 70 1/2. By spreading the distributions in this manner, you are not required to take any large amounts in any single year and thereby avoid pushing yourself into a higher tax bracket and exacerbating the amount of tax due.
At present, the conventional IRA account holders are supposed to begin minimum IRA distribution on April 1st in the year after turning 70½ years old. Participants, who have their retirement savings in a conventional 401k account, and continue to work at that company may defer their minimum IRA distribution until April 1 of the year after which they retire.
Participants who fail to initiate their minimum IRA distribution within these windows (or those who withdraw less than the required minimum distribution) are subject to stiff IRA penalties on their tax returns. Basically, these penalties take the shape of a 50% excise tax on the money that was supposed to be withdrawn, plus the account holder's normal rate of federal income tax and any appropriate state tax.
The only situation in which a minimum IRA distribution isn't required is in the case of Roth retirement accounts. The rationale behind this difference is that with Roth retirement accounts the taxes have already been collected since the Roth IRA contributions are after-tax contributions. However, the IRA beneficiary of a Roth owner must take annual minimum IRA distributions even though those distributions will be tax-free.
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