The government wants you to stash away money for your retirement and gives you tax breaks for doing it. Accounts like IRAs and 401(k)s allow you to put off paying taxes on the income you earn for many years – but not forever.
At age 70 ½, you are required to start withdrawing from your retirement accounts and pay taxes on the money you pull out as if it was a paycheck. If you don’t, and get caught, the penalty is stiff.
Time flies, and the deadline can sneak up on you. Let’s say you were born Jan. 1, 1948. You turned 70 ½ on July 1 of last year and must take a required minimum distribution (RMD) from your IRA.
In all subsequent years, your deadline is the last day of the year – meaning, in this example, you should have taken the money out by the end of 2018. But the Internal Revenue Service knows it is easy to miss that first deadline, so they give you some extra time on your first RMD – in this example, till April 1, 2019.
To determine how much you need to take out, see Publication 590 on the website www.irs.gov, which includes the Required Minimum Distribution Worksheet.
If you don’t need the money and would rather leave it in your IRA, you can reduce the amount you are required to withdraw by moving up to 25% of your IRA, to a maximum of $130,000, into a Qualified Longevity Annuity Contract or QLAC (pronounced cue-lack), also known as a longevity annuity.
Annuities are financial products that allow you to have your money grow tax-deferred for many years, and then take regular monthly income payments for the rest of your life. You can’t outlive those payments no matter how long you live.
Annuities lock up your money for a long time and tend to have high fees. I think that in most cases they are not appropriate for IRAs and 401(k)s because those accounts are tax deferred, so why put a tax-deferred investment into a tax-deferred account? It’s a little like sitting inside your house on a rainy day while holding an umbrella over your head.
But if you use this type of annuity, a QLAC, in your IRA or 401(k), the IRS will let you delay taking RMDs from that part of your retirement account until age 85. The money would keep growing tax-deferred instead of being subject to tax starting at age 70 ½.
Some people who have a lot of relatives in their 90s worry that they might live too long and run out of money. The QLAC can alleviate this worry by guaranteeing income payments starting at age 85 for as long as you live.
Required minimum distributions do not apply to Roth IRAs. And if you are working past age 70 ½ and contributing to a 401(k) at work, you are not required to withdraw from that 401(k) until April 1 of the year after you retire.
All of the rules governing RMDs would be too complex to cover thoroughly in this space, and I am not a tax adviser. This is a brief overview of the rules. If you’re 70½ or approaching that age and have a retirement account, you should consult a tax adviser.