Don't Mess With Taxes

Traditional individual retirement accounts, workplace 401(k)s and a variety of self-employment retirement plans allow your investments to grow tax-deferred until you decide to call the 9-to-5 grind quits.

As owner of such accounts, your plan (hope) is that you'll be making less money when you retire so your  tax rate should be lower when you start withdrawing the funds.

In order to keep the retirement fund growing (and delay the tax bill), many account holders put off taking out IRA and similar plan money as long as possible.

There comes a time, however, when the IRS says "enough." Uncle Sam has been waiting decades for taxes on your tax-deferred retirement earnings and he says the money must be distributed.

That time generally is when you reach age 70½.

But don't worry. You don't have to interrupt your momentous half-birthday celebration to head to the bank and withdraw retirement money. The IRS gives you until April 1 of the year following your 70½ birthday to take your first distribution.

More good news: You don't have to take all your tax-deferred retirement money out at once. Instead you take what are known as required minimum distributions, or RMDs.

The IRS rules on required retirement account distributions are the subject of Today's Tax Tip.

The bottom line is that you must take out the proscribed amount of you'll end up owing more. There is a penalty of 50 percent of the RMD amount if you don't take the appropriate distribution.

Three RMD tables: So exactly how much must you withdraw from your IRA or other applicable account? The IRS has developed three tables which are used to determine how much money you must withdraw .

Most individuals use the withdrawal guidelines in the Uniform Lifetime Table.

This table calculates individual life expectancy for unmarried account owners, married account holders whose spouses are not more than 10 years younger and married account owners who have named multiple account beneficiaries.

You find your age's distribution period and then divide your retirement account balance by that figure. For example, you're 71 and have a traditional IRA balance of $26,500. Your distribution that year would be $1,000 ($26,500 ÷ 26.5 years = $1,000).

You always can take out more than your RMD, but not less.

And if the Uniform Lifetime Tables doesn't work for you, check out the other two RMD tables in Appendix C of IRS Publication 590, Individual Retirement Arrangements (IRAs).

You also might find these items of interest:

• Required IRA distribution deadlines, charitable rollover alternative
• Handy retirement plan rollover chart
• Contribute to your retirement accounts