We're always being reminded to save for retirement in tax-advantaged accounts like 401(k)s or IRAs. But did you know the government does an about-face and forces us to take money out of those accounts once we reach retirement? It's called the required minimum distribution (RMD) rule. Here are some tips you should know about RMDs well before you reach retirement age:
Did you celebrate your 70½th birthday in 2014? Do you have a traditional or rollover IRA? If both answers are yes, the deadline for taking the initial required minimum distribution from your retirement account is April 1, 2015.
Beware the Tax Torpedo Large retirement account balances can cause Social Security tax problems
When you reach age 70 ½, the trigger requiring distributions from qualified retirement accounts is pulled. This annual Required Minimum Distribution (RMD) applies to Traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k), 403(b) and other defined contribution plans. Amounts not distributed on a timely basis could be subject to a 50% penalty. Thankfully, the RMD rules do not apply to Roth IRAs.
The RMD rules are established to ensure the deferred tax benefit for certain retirement accounts does not go indefinitely into the future. In other words, the IRS now wants their cut of your tax-deferred savings accounts. The amount you must take out each year is based upon your age, your spouse’s age and your filing status.
The Tax Torpedo
The Tax Torpedo refers to the surprising event of having your Social Security Income taxed. Depending on your income and filing status, up to 85% of your Social Security Benefit could be subject to income tax.
Can a Self-Emplyed person, who is still working full-time skip thier Pension/IRA RMD (Required Minimum Distribution)?
No. Generally, you must begin taking "required minimum distributions" (RMDs) from your qualified retirement plans and IRAs after you turn age 70 1/2. Then you must continue taking RMDs for each succeeding tax year. However, you can delay RMDs from qualified plans if you're still working full time and you don't own 5% or more of the company. There is no such exception for IRAs. Because your Simplified Employee Pension (SEP) is treated as an IRA rather than a qualified plan, you must start taking RMDs after you turn 701/2 whether you are still working or not.
So, remeber: In any event, full-time workers can't postpone RMDs from an IRA.