Avoid stiff RMD penalties: You may begin withdrawing funds from your IRA and 401(k) accounts at age 59 1/2, but when you turn 70 1/2, it's required.
When you reach your seventies, you may be required to take distributions from your IRAs and other retirement accounts
Withdrawal requirements will vary from person to person since they depend on several factors
Failure to take required distributions may result in a stiff penalty
After decades of socking away money in retirement funds, baby boomers may hit the required minimum distribution (RMD) age threshold. That age may differ depending on when you hit 70 1/2 due to the new SECURE Act, but if you haven’t hit 70 1/2 by December 31, 2019, it’ll come into effect at 72. The government requires that you start drawing down your retirement assets from your individual retirement account (IRA) or company retirement plan via RMD, or else face a stiff penalty—50% of the RMD. Read the details of the SECURE Act here.
Taking an IRA minimum distribution isn’t a complicated transaction, but there are details that need to be managed in order to avoid big penalties. “As baby boomers reach their seventies, they should be aware that they will need to take RMDs from their retirement accounts,” said Dara Luber, senior manager, retirement at TD Ameritrade, Inc.
“While it can be somewhat complicated to figure out your IRA RMD, it’s important to get it right because not taking the correct amount, or not taking them at all, could mean big tax penalties. You also need to know that distributions count as income and will be taxed,” Luber explained.
And make sure your retirement account beneficiary designations are up to date. “Not updating your beneficiaries, or having no beneficiaries, could mean your assets won’t be distributed according to your actual wishes,” Luber added.
Unlike a traditional IRA, which is tax-deferred until withdrawn, a Roth IRA is taxed up front but is tax-free when you take it as a distribution. And, again, with a Roth there is no RMD during the owner’s lifetime. However, Roth 401(k) plans have RMD requirements. Contact your plan administrator on the company 401(k) plan to learn how it processes 401(k) RMDs. But a word of caution: if you’re taking an IRA RMD and considering converting your traditional IRA to a Roth IRA this year, you must first satisfy this year’s RMD. In other words, you’re not allowed to convert RMD money.
“If you have any questions about your RMD, talk to your financial professional to ensure that you understand all the withdrawal rules,” Luber concluded.
TD Ameritrade does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances.
*An investor should consider a 529 Plan’s investment objectives, risks, charges and expenses before investing. The Program Disclosure Statement available from the issuer, contains more information and should be read carefully before investing.
Investors should consider before investing whether their or their beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program and should consult their tax advisor, attorney and/or other advisor regarding their specific legal, investment or tax situation.
Participation in a 529 College Savings Plan does not guarantee that contributions and the investment return on contributions, if any, will be adequate to cover future tuition and other higher education expenses.
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