21. Mandatory distributions at age 70.5

21. Mandatory distributions at age 70.5

With a traditional IRA or ANY type of 401k/403b you must take "Required minimum distributions"or RMDs annually. You have until April 1 of the year that follows the year you turn 70.5 to start taking RMDs. If you do not take your RMD you will pay a 50% penalty. That's losing half of your RMD to the IRS. DON'T DO IT! To calculate your own RMD the following link and find the section labeled "How is the amount of the RMD calculated?"

The money you have saved in your Roth IRA is exempt from this rule. This is where Roth IRAs really shine. The money in your Roth IRA can grow tax differed your whole life. This helps make your portfolio last longer and hopefully leaving more money to your heirs. If you have a Roth 401k/403b you should roll it into a Roth IRA before you hit 70.5. This will shelter that portion from RMDs.

There is one way to keep your RMD from pushing you into a higher tax bracket. You can have your RMD transferred directly to a charity. This then becomes a tax deduction negating your extra income. If you are still working you do not have to take an RMD from your 401k/403b. You will still have to take RMDs from a traditional IRA while still working. You do not have to spend it though. You can just reinvest the money in a taxable account.


From the IRS website-
       When a retirement plan account owner or IRA owner dies before RMDs have begun, different RMD rules apply to the beneficiary of the account or IRA. Generally, the entire amount of the owner’s benefit must be distributed to the beneficiary who is an individual either (1) within 5 years of the owner’s death, or (2) over the life of the beneficiary starting no later than one year following the owner’s death.
 
Sources
http://www.bankrate.com/brm/itax/tips/20030325a1.asp
http://www.irs.gov/retirement/article/0,,id=96989,00.html