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Required Minimum Distributions
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The assets in your Traditional IRA and employer-sponsored plans have been growing tax-free for decades.You must begin drawing down the balance in these accounts annually over your life expectancy by April 1st of the year after the year you turn 70 ½. This is called your "Required Minimum Distribution”.

 

CAUTION! If you wait until April of the year after you turn 70 ½, you must take two distributions that year: one for the preceding year and one for the current year.

There is an exception to the RMD requirements for employer-sponsored plans. If you are still working and do not own more than 5% of the company, RMDs can be delayed until April 1st of the year after you retire. If you wait until April of the year after you retire, you must take two distributions that year: one for the preceding year and one for the current year.

 

While you generally want to avoid the taxing of assets as long as possible, it can make sense to take withdrawals earlier than required or in excess of what is required:

  • If you need the money, take it!
  • Coordinate withdrawals from pre-tax and after tax accounts to reduce taxes in retirement.
  • If you will be leaving pre-tax assets to a beneficiary in a higher marginal tax bracket—you may want to withdraw more now and pay the taxes at your current lower rate. (Non-qualified assets receive a "step up” in basis at death.)
  • Although you cannot convert RMDs to ROTH IRAs, you can convert any additional amount over and above the Required Minimum Distribution to a ROTH IRA—If this ROTH is the first you have funded, the assets must remain in the account for 5 years for the growth to avoid taxes. If you have funded ROTHs in the past, your first ROTH contribution is the "birth date” for satisfying that 5 year rule.

 

NOTE: Consider taking your RMD automatically each January, then there is no chance of missing a distribution during life or during your year of death.

 

ROTH IRAs are not subject to RMDs. By rolling ROTH assets in employer-sponsored plans to a ROTH IRA, you can avoid the Required Minimum Distributions.

 

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