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IRA 70.5 IRS Withdrawal Rules

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    • Required minimum distributions must be included on your income taxes.tax forms image by Chad McDermott from Fotolia.com

      Some Individual Retirement Accounts (IRAs) require that account holders start taking required minimum distributions in the year they turn 70-1/2 years of age. The Internal Revenue Service (IRS) mandates these distributions, which cannot be rolled over into another qualified retirement plan, and imposes penalties on people who do not take the required amount. The amounts only function as a minimum withdrawal; account holders can take as much out of the account as they want.

    Affected Accounts

    • The IRS only subjects tax-deferred IRAs to required minimum distributions starting at age 70-1/2. Tax-deferred IRAs include traditional IRAs, Simplified Employee Pension (SEP) plans and Savings Incentive Match Plans for Employees of Small Employers (SIMPLE). When the withdrawals are taken, they are treated just like any other tax-deferred IRA withdrawal: the account holder must include the withdrawal as part of his taxable income for the year. Roth IRAs do not force account holders to take withdrawals at any age.

    Withdrawal Amounts

    • The IRS determines the sum that account holders must withdraw based on the account holder's life expectancy and the value of the account as of Dec. 31 of the previous year. The IRS publishes several life expectancy tables. Most people use the uniform table. However, if an account holder's spouse is more than 10 years younger, the joint and last survivor table is used. If the account was received as a beneficiary, the single life expectancy table is used. Once the IRS determines the life expectancy, the value of the IRA is divided by the life expectancy to determine the required minimum distribution amount.

    Withdrawal Penalties

    • If an account holder fails to take a required minimum distribution from the account, the IRS imposes a 50 percent penalty on the unwithdrawn amount. In order to avoid this penalty, the required minimum distribution amount must usually be taken before Dec. 31. However, in the year that the account holder turns 70-1/2 years of age, the required minimum distribution can be taken as late as Apr. 1 of the following year. For example, if an account holder was supposed to take out $30,000 but did not take out any, the penalty would be $15,000. If the account holder should have withdrawn $30,000 but only took out $20,000, the penalty would decrease to $5,000 (50 percent of $10,000).

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