Avoiding penalty taxes on retirement plans.

Tax boundaries and retirement.

There are a few boundaries to keep in mind when deciding how and when to take distributions from your retirement plans.

Limits on contributions.

First, it should be noted that individual retirement accounts (IRAs) have a specific limit on how much you can contribute in a given year. (For 2018, the limit is $5,500; if you’re age 50 or older, however, you can increase that amount by $1,000).

If your regular contributions exceed this limit, you may be subject to an annual 6% excess-contributions penalty tax.

Restrictions on making withdrawals.

Likewise, since the money in these accounts is intended for your retirement years, tapping the funds early, i.e., before you’re 59½, may result in a 10% penalty tax in addition to ordinary income taxes.

Required minimum distributions.

In most cases, you will be required to start receiving distributions from your IRA by April 1 of the year after you turn 70½ (so celebrating your 70th birthday on December 1, 2017, would mean that you would turn 70½ on June 1, 2018. So you would have to start receiving required minimum distributions (RDMs) from your IRA by April 1, 2019).

If you’ve waited that long, however, you’ll most likely find yourself having to take two distributions in your first year, which may result in additional taxes, as your income will be larger than usual for that year.

Once you start receiving required minimum distributions from your IRA, you’ll need to make sure of the following:

  • First, after the initial year, you must receive required minimum distributions from your IRA by December 31 of each year.
  • Second, your distributions each year must be at least equal to your required minimum distribution in order to avoid a 50% penalty tax (i.e., if you are required to receive $10,000 but only receive $5,000, you are subject to a $2,500 penalty tax—50% of the difference).

Remember, being mindful of the boundaries will not only save you money; it will help preserve your quality of life.

This material is for informational purposes only. Neither New York Life nor its agents provide tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.

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