Company retirement plans and individual retirement arrangements were developed by the Congress to help people save for their retirement. In general, these plans permit tax-deductible contributions and tax-deferred growth on those contributions. Then, upon retirement, minimum IRA distributions from these plans are required which are then taxable, providing a way for the government to recover the tax it has never collected.
These plans either fit into person plans or employer-sponsored retirement plans. The personal plans include your individual retirement arrangement (IRA) and your Roth IRA. The main constituents of employer-sponsored plans are 401(k), Roth 401(k), 403(b), and pension plans. The unique feature of both the Roth 401(k) and the Roth IRA is that the contributions are not tax-deductible. However the minimum IRA distributions come out tax-free as illustrated on the table below. Paradoxically, IRS does not require minimum IRA distributions for the owner of a Roth IRA yet it does for a Roth 401(k) even though those distributions are tax-free.
As per the Minimum IRA Distributions (also called required minimum distributions or RMD) rules, which are summed up at the end, the IRA RMD have to commence once you are 70½. It must be noted that if you are presently actively employed with a company, you can hold up withdrawing your RMD from the company retirement plan until you retire. RMDs are based on the aggregate of accounts of the same type – not among different types of plans. In simpler terms, a person having multiple IRA accounts has to sum up the amount of all these accounts, but need only take minimum IRA distributions from only one IRA account. You then repeat the same process with your 401(k) accounts, and so on. For purposes of calculating the minimum IRA distribution, one is not allowed to combine IRA balances and 401(k) balances as these are plans of a different type. Each plan type must have its own distribution calculated and withdrawn from that type of plan.
It is compulsory that the minimum IRA distribution begins by April 1st of the year following when your age will be 70½. However, by December 31 of the same year, you must make your 2nd minimum IRA distribution. By doing this, you can make two IRA RMDs in a single year – which makes it possible to amplify the rate of tax employed on them. It is advised to commence your first IRA Minimum Distribution before December 31 of the year when your age becomes 70½ and then go for your 2nd IRA RMD by December 31 of the following year – so as to diminish the rate of tax applicable to them.
Every minimum IRA distribution an owner withdrawals is equal to the aggregate value of all IRA accounts (not including Roth IRAs as they are of a different type) on Dec. 31 of the year preceding the year you make that IRA RMD – divided by your (remaining) life expectancy as determined by IRS publication 590 Appendix C. Refer to Table III in Appendix C for this, or else refer to Table II if you are married to a spouse who is more than a decade younger than you. Table I is for those who are inheritors of the actual owner of an IRA.
Browse through the Table and go to the column which matches with your age and thoroughly read the matching (rest of the) life anticipated for your factor in your Minimum IRA Distribution estimation. You will have to take a second look at Table III's value for future IRA RMDs as you age. Take your required minimum IRA distribution from any account among your IRAs.
|Required Minimum Distribution Begin for Owner (not beneficiary)|
|Qualified Plan Type||Tax Status||RMDs begin|
|IRA||Tax-deferred||After turn 70½
By IRA rules
|Roth IRA||Tax-free||No RMDs|
| Company Plan Examples
Note: Delay RMDs if still working for company with plan, and check rules with Plan Administrator
|403(b)||Tax-deferred||After turn 70½|
|401(k)||Tax-deferred||After turn 70½|
|Roth 401(k)||Tax-free||After turn 70½
|IR Annuity||Tax-deferred||After turn 70½|
Lose a Fortune on Your 401k Rollover
If you do not do any of these correctly:
- Opt for a distribution rather than direct transfer
- Rollover company stock to an IRA
- Choose to rollover to a Roth IRA
- Rollover to your new employer’s 401k
- Rollover post-tax contributions