Planning an IRA withdrawal? Know the rules

The rules about when you must take out money from your individual retirement account and other such vehicles are vexing. Mess this up, and you owe a penalty. Here's what anyone nearing age 70 must know.

If you are age 70½ or older or turn 70½ by this year's end and have tax-deferred retirement accounts, the Internal Revenue Service has your number. That number: your required minimum distribution (RMD), or what you must begin distributing from your various individual retirement accounts.

For IRS purposes, you reach 70½ on the date six calendar months after your 70th birthday. For example, if your 70th birthday is June 30 you reach age 70½ on Dec. 30 and you must take your first RMD by April 1 of the next year. If your 70th birthday falls on July 1, you reach age 70½ the following New Year's Day and you must take your first RMD by April 1 of the year following this Jan. 1.

You have until Dec. 31 of each tax year to take these distributions.

Types of accounts where RMDs apply. While your invested money sat in your qualified retirement accounts, the IRS deferred any taxes due until a later date. That date arrives when you hit age 70 ½.

RMDs affect many types of accounts, including traditional IRAs, simplified employee pension (SEP) and savings incentive match plan for employees (SIMPLE) IRAs and employer retirement accounts such as 401(k)s and 403(b)s.

Once you reach the trigger age for RMDs, the IRS requires that you start taking RMDs and begins collecting taxes previously deferred. Taxes come due on amounts only as they are distributed to you and not while you keep them invested.

For the year you first reach 70½, you must take a minimum distribution either that year or no later than April of the following year. Every year after, you also must take the required minimum distribution by Dec. 31 of each tax year.

Beware deadline penalties. Not only does the IRS want to tax revenue from your retirement accounts, if you fail to meet the deadline for distribution the taxman sticks on an additional and whopping 50% penalty.

Figuring out what you owe. IRS publication number 590 explains how to calculate the actual amount you must take as an annual distribution and additional information on how RMDs apply to each type of retirement account you might own.

Generally, calculate RMD for each account by dividing the prior Dec. 31 balance of that IRA or retirement plan account by a life expectancy factor. Use the:

• Joint and Last Survivor Table if your sole beneficiary of the account is your spouse and your spouse is more than 10 years younger than you;
• Uniform Lifetime Table if your spouse is not your sole beneficiary or your spouse is not more than 10 years younger; and
• Single Life Expectancy Table if you are a beneficiary of an account.

These great resources help you avoid the price of getting these calculations wrong – a price high enough that I recommend you consider help with the calculation and with getting the proper amount withdrawn from your accounts before the IRS deadline.

I especially warn those tracking more than one tax-deferred retirement account. If you still have years or even decades before RMDs apply to you, your parents or loved ones 70½ or older need this reminder, too.

Taxes are a part of life. Penalties you avoid.

AdviceIQ — @adviceiq on Twitter — is a Paste BN content partner offering financial news and commentary. Its content is produced independently of Paste BN.