Individual retirement accounts offer investors several tax benefits as they save for retirement. In return for the tax perks, however, you must follow several rules and regulations unique to IRAs. Failure to do so can result in tax-related sanctions from the IRS. If you fail to cough up the required minimum distribution from your traditional IRA, you'll face one of Uncle Sam's stiffest IRA tax penalties.
If you own a Roth IRA, you do not have to worry about paying the required minimum distribution. It only applies to traditional IRA accounts. Because the IRS never taxes the contributions you make to a traditional IRA, it wants to make sure it collects taxes on at least a portion of your money before die. The agency has no such concern with Roths because the money that goes into a Roth is after-tax income.
The IRS requires that traditional IRA owners begin taking required minimum distributions each year starting in the year that they turn age 70-1/2. If you own a traditional IRA and continue to work past that age, however, you can wait to take your required minimum distribution until you retire.
Your can delay your first required minimum distribution until April 1 of the year that follows the year in which you turn 70-1/2. In all subsequent years, however, the IRS requires that you take your required minimum distribution for that year by December 31. If you delay your initial distribution to April 1 of the year after you turn 70-1/2, you still must take your second distribution by the end of that same year.
Generally speaking, the IRS uses your traditional IRA account value and your life expectancy to determine the amount of your annual required minimum distribution. You should, however, refer to IRS Publication 590 to figure out the amount you must withdraw. Publication 590 contains tables that you must use to figure your distribution. The amount changes on the basis of your beneficiary information and your spouse's age, if applicable.
The IRS uses a straightforward method to tax required minimum distributions. When you take a distribution, you simply pay regular income tax on the amount, just as you would any other traditional IRA distribution. If you do not take a required minimum distribution in a given year, the IRS charges a 50-percent excise tax on the amount you should have withdrawn.
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