Retirement Plan Distributions
The "Golden Years Rule" for Ages 59½ to 70½
How and when you crack open your retirement nest egg can have a major impact on your personal income taxes. While you may have been reducing your taxable income by setting aside money in a retirement plan, the time will come when you must settle the tax bill.
The optimal strategy for managing your taxes will depend on your individual situation. A key factor, in any case, is when you choose to take money out of your retirement plan, which is known as a distribution. Distributions from a retirement plan are generally taxed as ordinary income in the year received, unless rolled over to another qualified retirement plan.
You can begin taking distributions from your retirement plan as early as age 59½ without incurring the 10% penalty tax. Distributions before age 59½ may be subject to a 10% penalty tax in addition to normal income taxes. There are some exceptions to this substantial penalty tax. Check with your tax advisor before you contemplate taking an early distribution.
You must begin taking required minimum distributions (RMD) from your retirement plan generally by age 70½.
Required minimum distributions
If after you reach the age of 70½ you do not begin withdrawing the required minimum distribution, you could face a 50% tax penalty. The good news is that if you are still working and earning income after that age, you can delay taking the RMD until you retire. The bad news is that this exception does not apply if your retirement plan is an IRA or if you own at least five percent of your company.
Lump sum or series of distributions
Depending on your plan, you can choose to take out all your funds in a single lump sum or periodically (once a year, once a quarter, once a month, etc.). The distribution plan you choose will have an enormous impact on your tax situation. It's a very good idea to get professional advice from your tax advisor before making this crucial decision.
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