Required Minimum Distributions

Monday, December 08 at 09:45 AM
Category: Personal Finance

The best way to prepare for retirement is to save, early and often. Generally, one should set aside 10 percent to 15 percent of one’s income each year. If the habit takes hold early in one’s career, a very meaningful nest egg should be the result.  

Saving is easier when there is a tax deduction for it, which helps explain the popularity of the traditional IRA. However, the tax law includes a stipulation that those who have developed the savings habit will find disconcerting. Once one reaches age 70 ½, a program of required minimum IRA distributions must commence. Each year the IRA must disburse an amount geared to the life expectancy of its owner. The reason for the requirement is to make certain that the money saved for retirement gets used for retirement — or, at least, becomes subject to income taxes during retirement. 
How large are the payouts?
Required minimum distributions from an IRA won’t exhaust the account before the owner lives beyond age 100, even if the account has poor investment return. Accounts that enjoy even modest returns will keep getting larger in the early years of minimum distributions. This table shows the projected size of a required minimum distribution from a $1 million IRA at various ages, for various rates of return. It also shows total distributions and the balance remaining at age 100, if only required minimum distributions are taken each year. If a 6 percent annual rate of return can be achieved, the account balance won’t dip below $1 million until age 92.

If you have questions about when your required minimum distribution needs to be taken, or need assistance in getting your required minimum distribution taken by Dec. 31, then please call us.

Source: M.A. Co.
Rates of return are for illustration only and do not represent any particular investment.
(June 2014)
© 2014 M.A. Co. All rights reserved.
Tags: Financial Education, Investing, Retirement
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