For 2010, the Required Minimum Distributions for seniors aged 70 1/2 + will resume.  Back in 2008, the President signed into law the Worker, Retiree, and Employer Recovery Act of 2008 which allowed Americans to defer their RMD’s for the year 2009.  Now it’s mandatory to start taking out your RMD to satisfy this year’s requirement.

The deadline is usually set for April 1st of the following year for anyone just turning 70 1/2 to take your first withdrawal.   After that, they have until the end of that same year to satisfy that year’s RMD .  So for example, should you turn 70 1 /2 by Sept. of 2010, you have until April 1st of 2011 to take your required minimum distribution.  That is if you have not already taken out a distribution by Dec. 31st 2010.

Let’s say your birthday is March 1st.  In the above example, if you waited Jan. 15th, 2011 to take your 1st distribution, then that RMD would be factored on your attained age of 70.  You then would need to take out another RMD by Dec. 31 2011 and that distribution will be based on your age of 71.

Any missed required minimum distributions may be subject to a 50% imposed tax by the IRS.

For more info on IRS – Individual Retirement Arrangements (p590) download <—click here

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401K Rollover or 401K Withdrawal?

Closer to the last stages of your retirement, you’ll need to understand the distribution process.  You maybe changing careers or retiring soon and in need of income.  Regardless of the need, there’s some standard steps that you’ll need to adhere to.  If not done correctly, you may face adverse tax consequences.

While most employers no longer offer pensions, many still offer a 401k retirement plan.  With disciplined investing, you may have saved up a substantial nest egg.  If you’ve separated from your job or severed from service, it’s very important to handle everything properly.  It’s very crucial you understand the 401k withdraw process.  Foremost, when withdrawing from a 401k or any other qualified plan, there can be consequences.  If you are 59 1/2 or older, you can take withdrawals from your 401k retirement without any penalty.  In all cases that early retirement withdrawal prior to 59 1/2 can cost you an extra 10% tax.  This is in addition to you being taxed at your current income rate.  At age 70 1/2, it is mandatory to take withdrawals call RMD or required minimum distribution.  These penalties can be avoided by doing what’s called a 401k rollover.

Rolling your 401k maybe the best option for deferring taxation.  Doing a rollover allows you to move your funds from your current 401k to another account.  This is very commonly done by moving the funds to an IRA or individual retirement account.  By making a 401k rollover, you often have more control of your account than leaving it at your previous employer.  This is by far the most preferred method than having an old employer keep the funds.  The old employer can charge fees as well for doing so.

A lump sum distribution is also an option when making a 401k withdrawal.  Let’s say you cash out the old 401k.  Again if done prior to age 59 1/2, there is the 10% penalty.  Additionally, employers will require you to withhold 20% to cover income taxes.  There is one exception to this rule and it would applies to using the withdrawals for a 1st time home purchase.  The limit to that exception is up to $10,000 out of an IRA or 401k for sole use of a 1st time home buyer.  Another way to avoid taxation, is to do a direct transfer.  This is done by transferring the funds directly from your old employer to the new IRA account you set up or new 401k from a new employer.  If the distribution check was made out to you and mailed to you; then you have 60 days to complete a transfer to another institution.  The direct transfer is the preferred way since it does not require a deadline to meet.  Either way would work for a 401k withdrawal.

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