Must-Know Rules on Withdrawing Money From Retirement Funds
CNBC Senior Commodities Correspondent & Personal Finance Correspondent
After plowing money into 401(k)s and IRAs for decades, struggling over which investments to choose and how best to boost your returns, eventually you want to—actually, you have to—start to take that money out.
The law requires you to begin withdrawals from your 401(k)s and IRAs when you turn age 70 ½ and every year thereafter, unless you’re still working.
Last year, to help soothe older savers whose retirement accounts had been decimated by the 2008 stock market tumble, President Obama offered a brief reprieve. He signed into law a provision which allowed Americans to defer their required minimum distributions (RMDs) for 2009. These distributions are generally taxable at your ordinary income rate, so that was a nice break for many retirees.
But this year, it is back to business as usual. IRA and 401(k) owners who are over 70 need to make their required withdrawals for 2010 by December 31 or face a huge tax hit—the amount that should be taken out is taxed at a whopping 50 percent.
A recent survey by Fidelity Investments found that half of Americans over age 70 who are required to take distributions from the IRAs and 401(k)s are not aware that the waiver has ended, and they have to make their withdrawals by the end of the year. If you celebrated your 70th birthday this year, you may still be able to delay your withdrawals.
“One exception applies to those who just turned 70 ½ in 2010. Those taxpayers can wait until April 2011 to take their minimum distribution for this year," says retirement consultant Denise Appleby. “But then, they must take two minimum distributions in 2011—the one for this year and the one for 2011.”
According to the IRS, the required minimum distribution rules apply to all employer-sponsored retirement plans, including profit-sharing plans, 401(k), 403(b) plans and 457(b) plans as well as traditional IRAs and SEPs, SARSEPs and SIMPLE IRAs. The RMD rules also apply to Roth 401(k) accounts. (However, the RMD rules do not apply to Roth IRAs.)
The rules require a minimum amounts that a retirement plan account owner must withdraw annually starting with the year that he or she reaches 70 ½ years of age or, if later, the year in which he or she retires. Worksheets to calculate RMDs are available on the IRS website.
If you’re not sure if you’ve taken the appropriate distribution, contact your 401(k) or IRA provider. Also, if you’re considering converting your traditional IRA to a Roth IRA before the end of the year, you need to take the required minimum distribution before doing that conversion.
Watch Sharon Epperson's TV report about IRA and 401(k) distributions today on Power Lunch at 1pm, ET