You must withdraw at least a certain amount from your traditional IRA each year after you reach age 70 1/2. If not, you face a 50 percent penalty.
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.
Say you have just over $300,000 in your IRA. In your early 70s, your RMD would be around $12,000. If you take out $5,000, for instance, you’d be $7,000 short of your RMD. You’d owe a 50 percent penalty: $3,500.
The official required beginning date, or RBD, for IRA required distributions is April 1 of the year after the year you reach age 70 1/2.
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.
For many people, it’s wise to take your first RMD in the year you reach age 70 1/2. Waiting until the following year and taking two RMDs in that year could push you into a higher tax bracket.
One other option 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.
