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Retirement Distributions

Importance of a Properly Executed Beneficiary Designation

In our last newsletter, we discussed the importance of a properly executed beneficiary designation for your IRA or qualified retirement plan.

Let us look now at distributions.

In most cases, distributions prior to age 59 ½ in your IRA incur a 10 percent penalty. The same basic rules apply to 401ks and other profit sharing plans, but the age is 55. This is one of the few disadvantages of rolling 401k money to an IRA. There are exceptions to the 10 percent penalty rule so be sure to discuss this with us first before taking a distribution prior to age 59 1/2.

Required minimum distributions (RMDs) must be taken from your IRA for the calendar year you turn 70 1/2 years old. For the first RMD distribution only, the IRS gives you until April 1 of the year following the year you turn 70 1/2 to make this distribution. After that first year, annual distributions must be taken by December 31.

RMDs are not required from 401k and certain other plans if you are still working past age 70 1/2 and are less than a 5 percent owner of the business. This does not apply to IRAs.

RMDs are normally calculated by your account custodian and are based on an IRS factor table and the previous year-end balance of your account. As you get older, the percentage of your account that must be withdrawn goes higher.

The penalty for not taking the proper RMD is high with a 50 percent tax imposed on money not taken on time.

At the account holder's death, the beneficiaries have several options. Spouses can treat the IRA as their own and RMDs would be based on their age or they can use the decedent's age. Non- spouse beneficiaries have separate distribution options. Once again, we are here to help you with those decisions.