Are You Affected by IRA Minimum Distributions?
One of the touted benefits of a traditional IRA or 401(k) is the fact that the funds placed in these
accounts are not taxable until they are withdrawn. However, the federal government won’t let
that money go untaxed forever; the IRS requires that individuals must begin withdrawing a
certain percentage of the money, and pay taxes on it, beginning at age 70½. These withdrawals
are called “required minimum distribution” (RMD) or “minimum required distribution” (MRD).
What Are Minimum Distributions?
By April 15th the year following when individuals reach age 70½ they must withdraw their first
minimum required distribution (MRD). It doesn’t matter if they already began withdrawing
money from the IRA beginning anywhere between age 59½ and age 70½. At age 70½ tax rules
require that an actuarial percentage based on the IRS life expectancy tables be withdrawn from
the account and taxed as income in the current tax year. Basically, the IRS expectation is that all
the retirement funds will be withdrawn and taxed during the individual’s lifetime.
Obviously an individual is not required to spend the withdrawn funds; they can be reinvested or
distributed however the individual desires. MRDs are simply a major tax issue. The penalty for
failing to withdraw the MRD sometime during the tax year, or at least by April 15 of the
following year when taxes are due, is 50% of the amount of the MRD not taken. That’s a huge
penalty that must be paid in additional tax.
Multiple IRA and 401(k) Accounts
The rules of MRDs are slightly different between IRAs and 401(k) accounts. If individuals own
multiple traditional IRAs they are allowed to calculate the total MRD and withdraw that amount
from one or more of the accounts however they please as long as the total amount is
However, if individuals have multiple 401(k) accounts, they are required to withdraw the MRD
from each account separately. Also, individuals who are 70½ or older and are still working are
not required to take MRD from a 401(k) account with that employer.
Inherited IRA or 401(k)
Individuals who are younger than 70½ who have inherited an IRA or 401(k) may need to make
MRDs and pay the resulting federal income tax.
Rules concerning distributions from retirement accounts are very complex. Before making these
decisions you should consult with an attorney who is experienced in estate and retirement
Experienced estate planning attorneys Oklahoma City OK of the Parman and Easterday offers
estate planning and business planning resources to residents of Oklahoma City OK. To learn
more about these free resources, please visit http://www.parmanlaw.com today.