When
and how to tap tax-deferred retirement plans
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[June 23, 2011]
URBANA – If you
have money in an IRA, a 401(k), or any other type of retirement
plan, University of Illinois Certified Financial Planner Karen Chan
says you should know the basic rules about taking money out of those
accounts. If you don’t, you might pay penalties that could have been
avoided.
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“Your age at the time you take money out of retirement plans is the
main factor that determines whether you can withdraw money without a
penalty and whether you are required to take money out,” Chan said.
“You’ll owe income tax on distributions from tax-deferred, which are
also called traditional, types of retirement accounts, because you
haven’t paid tax on the money you contributed to the account or on
the growth in the account,” she said.
Chan explained that you can delay taxes on distributions by
transferring or “rolling over” the money into another retirement
account. Only the required minimum distribution or distributions
that are part of a series used to avoid early distribution penalties
cannot be rolled over. Use a direct or “trustee to trustee” transfer
to avoid complications.
Here are some details about how to avoid penalties based on your
age:
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-- If you are not yet 59 ½ years old, you will owe a 10 percent
early withdrawal penalty on distributions unless you qualify for an
exception. For most employer plans, you can avoid the penalty if you
no longer work for the employer and you are at least 55 years old.
If you are disabled or you need the money to cover medical expenses
that exceed 7.5 percent of your adjusted gross income, you won’t
have to pay the penalty. You can also avoid the penalty by
committing to taking a series of substantially equal distributions
for at least 5 years, or until age 59 ½, if that is later.
--If you are between 59 ½ and 70 ½, you are free to do as you please
with the money in your tax-deferred accounts. There is no penalty if
you take distributions, but neither are you required to take any
money from the accounts.
--Once you reach age 70 ½, you must begin to take annual
distributions from these plans. There is a grace period for the
first distribution. You can take it anytime during the year in which
you turn 70 ½, or you can delay it as late as April 1 of the
following year. If you delay, remember that your second Required
Minimum Distribution (RMD) will have to be made by December 31 of
that same year, and both will be included in your taxable income for
that year.
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--If you work past age 70 ½, you may delay distributions from your
current employer’s plans until you retire. This does not apply to
plans of previous employers or IRAs. Also, owners of more than 5
percent of a company are not allowed to delay their minimum
distributions past age 70 ½.
Your RMD is based on the balance in the account on December 31 of
the previous year and your age. You can take more than the RMD if
you want, but you will face a penalty if you take less. The penalty
is 50 percent of the minimum distribution amount that you failed to
take.
Chan said the financial institution that holds your account can
calculate the RMD for you. But you can also calculate it yourself.
Use the IRS Uniform Lifetime Table (Table III) found in the appendix
of IRS Publication 590, Individual Retirement Arrangements. If your
spouse is more than ten years younger than you, use Table II
instead. Find the distribution period using your age (and your
spouse’s age if using Table II). Divide that factor into the account
balance. The result is your RMD.
![](http://archives.lincolndailynews.com/2011/Apr/13/images/ads/current/vonderleith_bch120310.png)
Balances in your traditional IRAs are added together to determine
your RMD, but you can take it all from one IRA or withdraw from
several. If you have multiple 403(b) accounts, you can add those
together and decide from which account(s) you want to take the RMD.
“Roth accounts have different rules,” Chan said. “If you are the
owner of a Roth IRA, Roth 401(k), or Roth 403(b) account, there are
no RMDs during your lifetime. After your death, however, your
beneficiaries will be required to take annual distributions.”
[Karen Chan, News writer: Debra Levey Larson]
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