Overview of the IRA Mandatory Withdrawal Rules

The IRS imposes IRA mandatory withdrawals when you reach the age of 70 1/2. At this point, the IRS would like you to begin depleting the funds in your IRA at a rate that would, ideally, result in a $0 balance at the time of your death. Of course, it is very difficult to predict and reach this endpoint, but the IRS has created a standard formula to attempt to reach this goal. This formula is used each year to determine how much money you must withdrawal at the risk of penalty.

Purpose of Mandatory Withdrawals

The IRS provides tax deferred accounts so you can save properly for retirement. The purpose is not to leave the money in these accounts, never paying taxes, until your death. Instead, the funds are supposed to be used to support you and your family. The IRS imposes the mandatory withdrawal to encourage you to use the funds for this purpose. The mandatory withdrawal also prevents the wealthiest citizens from simply holding money in tax sheltered accounts until it can be passed on in their estate. If this were possible, IRA accounts would present unfair advantages to the wealthy.

Minimum Withdrawal Age

First, it is important to understand mandatory withdrawals do not begin at the minimum retirement age. That age, 59-1/2, is the age at which you may begin withdrawing funds without facing the 10 percent early withdrawal penalty. However, you also have the choice to not withdraw any funds until you reach the age of 70 1/2. In fact, once you reach age 50, you may begin depositing a larger annual maximum into your IRA and do so until the age of 70 1/2.

Mandatory Withdrawal Age & Amount

In the year you turn 70 1/2, you will be required to start taking money from your account. The amount you must withdrawal in a given term depends on three primary factors: your account balance, your life expectancy and your beneficiary. You can contact your account administrator to determine your account balance at any point. Your life expectancy is calculated in a chart provided by the IRS. This chart takes into account your age, marital status and other factors. For example, if you are a widow or widower, you may have a shorter life expectancy. Your life expectancy is recalculated each year taking into account any unique factors that may have changed over the course of the past 12 months.

Failing to Make Mandatory Withdrawals

If you do not make your mandatory withdrawal, you will face an excess accumulation charge on the money in your account. You will be forced to take an amount equal to your missed withdrawals out of your account at the time you file your taxes, and a 25 percent penalty will be assessed against those funds. You have all year to withdraw the funds. It is best to take the withdrawals periodically, but the IRS will only impose a penalty if you fail to make the withdrawal all together and leave the money in your account to accumulate interest.

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