Once you attain the age of 59 ½ you can generally make withdrawals from retirement plans without penalty. If you withdraw sooner there will likely be a penalty assessed in addition to tax owed on the amount withdrawn. There are some exceptions: If you use the money to buy a first home or pay for medical expenses, the penalty may not apply.
On the flip side, when you reach age 70 ½, you are required to begin taking distributions from your retirement plans. A required minimum distribution is the minimum amount you must withdraw from your account each year. This requirement applies to qualified, pre-tax investments in retirement funds. Roth IRAs do not require withdrawals until after the death of the owner.
If you inherit a retirement plan (IRA, SEP, annuity, etc.) from someone who had already begun withdrawals, you will need to continue making those withdrawals, and you will be taxed on the amount you receive. For some, adding the withdrawal to current income may place the individual in a higher tax bracket, creating an unwelcome tax burden.
If you are age 70 ½, the tax implications for a required minimum distribution can be avoided. If distributions are made directly from the retirement account to a qualified charity instead of an individual, the tax can be avoided. Such distributions may be made each year and will serve to satisfy some or all of the required minimum distribution.
If you are considering when to make a withdrawal from retirement funds or are in need of making a Required Minimum Distribution (RMD) and would like more information, we are happy to help.
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We have prepared a special report, Charitable Giving Through Individual Retirement Accounts, to help you determine how IRA distributions work as an excellent charitable giving tool.