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Do I have to withdraw from my IRA?
Q: I will turn 70 1/2 on December 30, 2015. Will I have to take a required minimum withdrawal from my IRA for that year? Would it be a lump sum because of the late date, or monthly beginning in January of 2015?
A: Traditional IRAs are designed to be drawn down over the course of their owners' retirement years. This is important because of the tax benefit involved with an IRA. Money in a traditional IRA has never been taxed, so the IRS wants that money to be taxed as income before the owner dies. This where the requirement for minimum withdrawals comes in.
The pace at which money has to come out of a traditional IRA to be taxed is determined by an IRS formula for Required Minimum Distributions (RMDs). You can get details on the formula at irs.gov, but here are some important things you should know about applying that formula to your situation:
- The minimum distribution requirement applies only to traditional IRAs. You did not specify in your question, but if yours is a Roth IRA then RMDs do not apply.
- You have until April 1 of the following year to take your distribution. You won't have to begin taking distributions in January 2015, and can actually wait until April 1, 2016.
- You can reduce your minimum distribution if your spouse is more than 10 years younger than you. A different RMD table applies in that situation, and it can help you keep money in the IRA longer if you are interested in prolonging the tax benefit.
- You can take more than the minimum distribution if necessary. It is important to remember that the RMD is a minimum, but it's not the only option you have. If you need more money to live on, you can withdraw from your IRA at a faster rate. The drawbacks are that this may deplete your resources too soon, and will subject the money to taxation more quickly.
- Don't be afraid to reinvest any excess. If you do not need all of the RMD amount to live off, there is no reason not to find appropriate investments for the excess, since your IRA will be providing regular liquidity in the years to come.
As much as people don't like being forced to take RMDs because they result in the money being taxed, it is actually a nice problem to have. Withdrawing the money because the IRS requires it rather than because you need it means you already have more than enough to live on -- and that's not a luxury all retirees can claim.
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