Taking Distributions from Your IRA
By: Source: AARP.org Date Posted: 2005-03-20 12:09:06
Individual Retirement Accounts (IRAs) are supposed to provide you with income during retirement. But many retirees don't like taking money from their IRAs. Why? There are several reasons.
First, your IRA money will last longer if you spread out your withdrawals over several years. Taking small distributions will also help keep a lid on the federal taxes you will owe on Traditional IRA earnings. You pay these taxes on the money you withdraw in any given tax year.
What You Should Know
Early Withdrawals
Generally, you can't withdraw any money from an IRA before you reach 59½. You must have a Roth IRA for at least 5 years before you can take any qualified withdrawals.
There are certain instances in which you can make an early withdrawal from your IRA without paying a tax penalty. This is called a qualified withdrawal. You can take qualified withdrawals under the following circumstances:
- You suffer a disability.
- You use the money to pay for higher education.
- You are buying your first home.
- You die. In this case, your family can make a qualified withdrawal from your IRA.
If you make any unqualified withdrawals from your IRA before you reach 59½, you will pay current taxes on the amount you withdraw, plus a 10-percent early-withdrawal penalty.
Late Withdrawals
Once you reach 70½, you'll have to take a minimum withdrawal from your IRA each year. If you fail to take distributions at this time, you will be taxed, at a whopping 50-percent rate, on the amount that should have been withdrawn. You don't have to take any distributions from your Roth IRA.
Calculating How Much to Withdraw
It's easy to calculate your minimum required withdrawal for a given tax year. Just divide the value of your account at the end of the previous year by the number of years in your life expectancy.
Here's an example. Let's say that your Traditional IRA account was worth $60,000 on December 31, 2000. Your life expectancy was 10 years. You should have withdrawn $6,000 from your Traditional IRA account in the year 2001. (The $60,000 IRA divided by your 10-year life expectancy equals $6,000.)
Your minimum withdrawal will change every year, as your account balance and your life expectancy change. Remember, you aren't required to make withdrawals from your Roth IRA.
What's your life expectancy?
How long does the IRS expect you to live? There are two ways to find out. First, you can use an IRS chart that recalculates your life expectancy every year. The second method calculates your life expectancy at 70½ and then subtracts one year from that life expectancy in each subsequent year.
Life expectancy calculations can be complicated. Before you make any decisions about how you will calculate your life expectancy, get expert advice. Find someone who can explain clearly how the different calculations work, and how they will affect your withdrawals. Once you choose a life expectancy calculation, you can't change your mind later.
For More Information
Internal Revenue Service
It's best to go to the source to find out how the Internal Revenue Service (IRS) regulations affect your ability to save through a Traditional or Roth IRA. Read IRS Publication 590: Individual Retirement Arrangements. You can order the publication by calling 800-829-3676 or you can read it online at the IRS Web site.
URL: http://www.irs.gov
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