The beginning of the greatest tax bill in US history starts to come due this year, as the first of the baby boomers hit age 70 1/2 and are required by law to begin distributions from their retirement accounts.
And there is nothing you can do to alleviate this.
Why is this happening?
If you were investing into a retirement vehicle like a traditional IRA, 401k, 457 plan or other tax-deferred vehicle, you had the option of starting to take your retirement savings to live on at age 59 1/2.
Depending upon your situation, most retirees try and let their retirement accounts grow untouched as long as possible.
Just over 22 percent of individuals who owned a Traditional or Roth individual retirement account (IRA) took a withdrawal in 2013. The overall IRA withdrawal percentage was largely driven by activity among individuals ages 70-½ or older owning a Traditional IRA—the group required to make withdrawals under federal required minimum distribution (RMD) rules for IRA owners beyond that age. In contrast, among individuals under age 60, 10 percent or fewer had a withdrawal.
For those at the RMD age, the withdrawal rates at the median appeared close to the amount that was required to be withdrawn, though some were significantly more. For instance, looking at the consistent sample in the EBRI IRA Database, approximately 25 percent of those 71 or older took a withdrawal amount in excess of that required by law for Traditional IRAs.
Interestingly, this MAY be one of the reasons so many people opt to take Social Security sooner. Use Social Security to live on while your nest egg grows. I had written previously about this topic in all honesty had not considered this facet of this.
So with these facts in mind let me go over a few of the common questions seniors would have on this topic…
Q: Is there any way to avoid paying the tax?
A: No, if you are 70 1/2 and have been deferring taxes for anywhere to 40-50 years it is now time to pay the piper. No way around it.
Q: How much do I have to take out?
In the quote above the “required minimum distribution” is mentioned. This is the mandatory amount that must be withdrawn from your account.
And whatever that RMD is, that is the money you get taxed on.
As far as what to do with the disbursed money, you need to talk to a professional who can properly advise you based upon your own individual needs and goals.
Subscribe to our Newsletter!
And get your free report, 19 Free Services Every Senior Needs