Turning 70? Know the Rules on IRA Withdrawals

If you're about to turn age 70, here's an item for your "to do" list: Begin taking withdrawals from your Individual Retirement Account.

You don't have to take your first so-called RMD, or required minimum distribution, until April 1 of the year after you turn 70½. For example, if you turn 70½ at any time in 2012, your RMDs don't have to begin until April 1, 2013. But waiting that long could be a mistake: Your second distribution would have to be made by the end of 2013, so you would end up with double the income in 2013 and that could push you into a higher tax bracket. Thereafter, each year's distribution has to be taken by Dec. 31.

If you're retired but you still have money in your old employer's 401(k) plan, you have to take withdrawals from that plan, too, even if it's a Roth 401(k). What if you're still working at the company? You don't have to take RMDs and you can keep making 401(k) contributions. But there's one exception to this rule: If you own more than 5% of the company and you have a 401(k) or similar plan, you have to follow the same schedule for RMDs as you would with an IRA.

While you have to take withdrawals from traditional IRAs and old 401(k) plans, you don't have to take withdrawals from your Roth IRA, assuming you're the original owner or his or her spouse. What if you are over 70 and you convert a traditional IRA to a Roth? That might be a smart move--but you can't count the sum converted toward that year's RMD and the amount converted would be taxable.

To calculate how much you should withdraw each year, you might ask your financial advisor or try one of the online calculators. Ignoring RMD requirements can have serious tax consequences, including a federal tax penalty equal to 50% of the amount that should have been distributed.

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