What you need to know about withdrawing money from tax advantaged retirement plans

Tom Woulfe

CPA, Partner, Evans & Woulfe Accounting Inc.

If you have retirement savings in IRAs, 401(k)s and/or business-sponsored retirement plans, one essential element of retirement planning is when to take required minimum distributions (RMD) from retirement accounts.  RMD rules govern how much you must withdraw from certain retirement accounts and when you must start taking withdrawals.

Failure to take a RMD in any given year can result in steep tax penalties.  Failure to take a RMD by the deadline lays on one of the heftiest U.S. tax penalties around: 50 percent.  Most tax-advantaged retirement plans have RMD rules. But the rules vary from one account to another.  As you’re planning for retirement withdrawals, it’s essential that you take these rules into account:

• First Roth IRAs do not require RMD, so, consider converting your traditional IRA to a Roth before you reach 70 ½ to reduce RMD in the future. You can choose to convert your IRA assets to a Roth IRA at any time, even in retirement.
• Some types of retirement plans don’t have RMDs until you retire. If you have a 401(k)s or 403(b)s you can put off taking RMDs if you’re still working.
• For all non-Roth IRAs, including SEP and SIMPLE plans, you must start taking RMDs by April 1st of the year following the year in which you turn 70 ½. It doesn’t matter whether you’re retired.
  • Be careful because you may get hit with two withdrawals in the same year. Once you start taking RMDs you must keep taking them every year by December 31.
• Be sure to calculate the cost in taxes. Taking two RMDs in one year could throw you into a higher tax bracket, increasing your total taxes owed. For some individuals, it’s smarter to take RMDs one year at a time, even if it means taking that first withdrawal a few months before you technically must.
• There are different rules and options for inherited IRAs depending on if the recipient is the spouse, another person or an entity.

The rules are complicated and there is no “one size fits all”, so always consider consulting with a tax professional before making any decisions.