WHEN MUST YOU START TAKING RETIREMENT PLAN DISTRIBUTIONS?
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You can take out any amount at any time from your retirement plan without facing an early withdrawal penalty once you have reached age 59?, but you must begin withdrawing minimum annual amounts from your plan once you reach age 70?.
If you fail to take out the required minimums, you may face a 50 percent excess accumulation tax. The Internal Revenue Service imposes the tax on any part of the annual minimum distribution that you fail to take.
If you are still working at age 70?, however, you can delay beginning your required minimum distributions until you retire—with two exceptions: If you own at least 5 percent of the company or if your plan is an IRA, you must begin making regular distributions even if you are still working.
Your required beginning date is the deadline to begin taking distributions from your plan. If your plan is an employer plan, you have two possibilities: Your deadline is April 1 of the year following the later of either
- The year you attain age 70?
- The year you retire
For example, if you retired at age 68 and reach age 70? any time during the year 2005, your required beginning date would be April 1, 2006. Beginning the second year after you turn 70? (or after your beginning date, if it's later), you must take your required distribution during the calendar year—in other words, from January 1 through December 31. You cannot wait until April 1 of the following year to take the distribution.
There also are a few other special rules. For example, people participating in a government or church plan also may be able to delay their required beginning date. If you have specific questions in this area, you will want to check with your plan or tax advisor.
You also need to carefully consider the timing of your first year's payments in light of possible tax consequences down the road. What does this mean? Consider the following example. Eleanor turned age 70? in 2004 and delayed taking her first required distribution until March, 2005. That same year, her second year after turning 70?, she had to take another required distribution before December 31. The result? Taking two distributions in the same year pushed Eleanor into a higher income tax bracket.
Next, we'll look at the ways in which you can withdraw money from your plan at retirement.