With most retirement accounts, whether they are 401(k)'s, IRAs, or annuities, 59 ½ is the magic age. That's when you can receive distributions without a 10% federal tax penalty. With an IRA, the rules are simple: after you reach that age you can withdraw as much as you want, whenever you want (taxes may apply, of course). With employer retirement accounts, typically there are restrictions on distributions as long as you are still working for the employer.
Just because you can take a distribution doesn't mean you should take a distribution, however. In addition to tax consequences, withdrawals can put a dent on the earning power of what you have invested.
Below is a brief synopsis of the distribution requirements of the most common retirement accounts.
Traditional IRAs and Company Retirement Plans
You must start taking required minimum distributions (RMDs) from your Traditional IRAs and ex-employer's retirement plan, at age 70 ½. You may defer your first year's distribution until April 1st following the year you reach 70 ½. All subsequent distributions must by withdrawn by December 31st.
If you continue working for your employer, you may be able to defer your first distribution past age 70 ½ and until April 1st of the year following the year in which you separate from service.
This minimum is based upon your account balance at the end of the year and a factor taken from an IRS life expectancy table.
You can always withdraw more than the minimum, but the more you leave, the more your money could potentially grow on a tax deferred-basis.
The federal penalty tax for failing to take out your RMD is 50% of the amount that should have been distributed but was not. For example, if the RMD is $3,000 but only $1,000 was taken, there is a 50% penalty on the $2,000 that was not taken.
Social Security Benefits
You can collect any time after age 62. You will receive reduced benefits if you start payments earlier than the Social Security retirement age, which is 65-67 depending on your year of birth.
Your children and your spouse may also be eligible for benefits on your account. A spouse age 62 or older, a spouse under age 62 who is caring for a child under 16, a disabled child who is receiving benefits from your earnings, and unmarried children under 18 (or under 19) if they are enrolled full-time in high school could potentially utilize this assistance.
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If you are 55 or older the year you separate from your employer, distributions taken from that employer's qualified retirement plan avoid the 10% premature penalty tax. Ordinary income tax still applies.
This material is for informational purposes only. Wachovia Securities does not provide tax or legal advice. Be sure to consult with your tax and legal advisors before taking any action that may have tax consequences.