Many people begin withdrawing funds from qualified retirement accounts soon after they retire in order to provide annual retirement income. These withdrawals are discretionary in terms of timing and amount until the account holder reaches age 70½. After that, failure to withdraw the required minimum amount annually may result in substantial tax penalties.
For IRAs, individuals must begin taking minimum distributions no later than April 1 following the year in which they turn 70½. The same holds true for 401(k)s, with one exception. Distributions from a 401(k) may be delayed until later than age 70½ if the plan participant continues to be employed by the plan sponsor and does not own more than 5% of the company.
There are several other issues that plan participants may need to address when taking distributions from their retirement plans. For example, if distributions are taken all at once in a lump sum individuals born before January 2, 1936 qualify for special 10-year forward income tax averaging. In addition, plan participants may be eligible for a tax break if their lump-sum distribution is less than $70,000 and certain requirements are met. Besides lump-sum distributions, there are several other ways retirement assets can be removed from a qualified retirement plan each with its own benefits and trade-offs. Thus, plan participants should consult a qualified tax advisor to ensure that all distribution options are explored.