You must withdraw at least a certain amount from your traditional IRA each year after you reach age 70 1/2. IRS tables set the required minimum distribution (RMD). At age 72, for example, you must withdraw about 4 percent of your IRA balance of the previous December 31. By age 78, the RMD is around 5 percent of the previous year-end’s IRA balance. And so on.
You can take out more but you must take at least the RMD. If you withdraw less than the RMD amount, the shortfall will be subject to a 50 percent penalty tax.
IRA withdrawals, including RMDs, can create tax headaches:
* IRA withdrawals are usually taxable income. Rates up to 35 percent now apply. If income tax rates rise in the future, as many people expect, the tax on IRA withdrawals may become greater.
* Taxable IRA withdrawals boost your adjusted gross income (AGI), and a higher AGI can have negative consequences elsewhere on your tax return. You might owe more tax on your Social Security benefits, for instance.
One solution is to convert your traditional IRA to a Roth IRA. You’ll owe tax now but you’ll be able to take tax-free withdrawals after five years and after age 59 1/2. Moreover, you’ll never have to take RMDs from a Roth IRA you’ve established.
