Most qualified
retirement plans offer significant tax benefits for those willing to
follow a few IRS specified rules. The government wants to make
these plans (401(k)s, Keoghs, SEPs and traditional IRAs) available
for specific needs, and has established tax law to help eliminate
potential abuses of these tax advantaged investment
alternatives.
Retirement Plans are Intended for Retirement
For one thing, the government wants to
make sure that such savings (and income tax benefits) actually go
towards providing retirement income. Stiff penalties for early
withdrawal help encourage investors to reserve their qualified plans
for use during their retirement years.
Required Withdrawals
On the other hand, the government also
wants to ensure that they will one day be able to tax these
accumulated funds. If you have a 401(k), a Keogh, a SEP or a
traditional IRA, you must begin taking regular distributions from
your plan by April 1st of the year following the year you turn
70½.
Although the tax code allows you to wait
until April 1 of the year following the year you turn 70½, it is generally a good idea to take your first
mandatory withdrawal in the same year you turn 70½. If you wait, you will have to make two
withdrawals in the first year, doubling the amount of taxable income
you must declare and potentially increasing your marginal tax
bracket.
The amount you are actually required to
withdraw each year, and which will be subject to taxation, is based
on tables which estimate your remaining
lifetime.
Calculating Your Required Withdrawals
It is very important that you maintain a
structured process of minimum withdrawals from your qualified
plans--if you do not meet the required minimum distribution
withdrawals, the IRS will impose a penalty of 50% of the amount not
withdrawn, plus the income taxes due. The good news is that
the IRS has made calculating your required minimum distributions
much easier beginning January 2001.
Based on your age, you simply divide your
qualified plan balance as of the last day of the previous year by
the factor from the IRS Pub. 590 table shown below. The
resulting quotient is your annual required minimum
distribution.
|
Uniform Lifetime Table
(for use by unmarried owners and owners
whose spouses are not more than 10 years younger in preparing
2002 tax returns) |
| Current
Age |
RMD
Divisor |
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113
114
115
and older |
27.4
26.5
25.6
24.7
23.8
22.9
22.0
21.2
20.3
19.5
18.7
17.9
17.1
16.3
15.5
14.8
14.1
13.4
12.7
12.0
11.4
10.8
10.2
9.6
9.1
8.6
8.1
7.6
7.1
6.7
6.3
5.9
5.5
5.2
4.9
4.5
4.2
3.9
3.7
3.4
3.1
2.9
2.6
2.4
2.1
1.9 |
|