Distribution Rules for Retirement Plans

Follow Distribution Rules or Loose Hard Saved Money to Penalties

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401k and Traditional IRA distribution rules
Ensure You Don't Lose Money to Penalties

If you are nearing the age of 70½, and have not yet started drawing money from your retirement accounts, then you may fall afoul of IRS rules concerning the age at which retirees must start withdrawing from their accounts.

Failure to heed these rules can result in the IRS applying massive penalties to the money that you have saved up in your retirement accounts. Below, we briefly cover all of the relevant rules for such programs:

Distribution Rules for 401(k)s

IRS rules for 401(k) programs are that, at the latest, the employee must begin receiving distributions of funds from the 401(k) program during the year after they retire, or the year after they turn 70½. At that point, the IRS imposes a "Required Minimum Distribution".

The amount of this minimum distribution is based on Life Expectancy tables maintained by the IRS, and the penalty for failing to make this distribution is one of the largest penalties the IRS can assess.

Should you fail to withdraw at least the Required Minimum Distribution from your 401(k), the IRS will assess a penalty of 50 percent of the amount that should have been distributed.

These rules are the same for all 401(k) programs, including the Roth 401(k), Solo 401(k), and 403(b) programs.

Note that the Required Minimum Distribution was suspended for the years 2009 and 2010 due to the economic crisis.

Distribution Rules for Traditional IRAs

Like 401(k)s, IRA programs have a maximum age beyond which the owner must begin withdrawing a set amount of funds minimum, or else forfeit 50 percent of those funds to the IRS.

As with the 401(k) program, this maximum age is the year after they retire, or the year after they turn 70½. This is true for derivative programs such as the SEP IRA and the SIMPLE IRA.

Exception to the Rules – The Roth IRA

The only exception is the Roth IRA.

Roth IRAs do not have a maximum age limit, and consequently there is no penalty in failing to withdraw money from a Roth IRA before a specified point in time. This can make Roth IRAs very useful in long-term retirement plans.

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