Life just became easier for millions of Americans with retirement accounts. The IRS recently announced new rules that simplify the way you are required to withdraw your retirement money

Age 70 ½ important

Generally, you must begin withdrawing money from tax-favored retirement plans in the year you turn 70 ½. This includes traditional IRAs, qualified retirement plans, and annuities. It does not include Roth IRAs, and if you're still working at age 70 ½, it generally doesn't apply to a qualified plan.

If the withdrawal rules apply to you, you can postpone your first withdrawal until April 1 of the year after you turn 70 ½. After that, you must withdraw a minimum amount each year by December 31. 

The old rules

Under the old rules, you were required to choose a beneficiary and a method to calculate your minimum withdrawal upon taking your first required distribution. These two choices determined how fast you were required to withdraw money from your retirement accounts. Once you made your initial choices, your decision could not be changed. 

The new rules

The new rules allow you to change beneficiaries and change previous distribution methods. Now you can use one simple chart to calculate your minimum required distributions. And you have more flexibility in choosing or changing a beneficiary. 

Using the new chart results in a smaller required distribution for most people. Since you aren't taxed on retirement accounts until money is withdrawn, the less you take out, the less tax you pay. This allows more money to be left in your retirement plan to grow, tax-deferred, for your future use or for your heirs.

One rule hasn't changed. You can still withdraw more than the required amount, but if you fail to take at least the minimum distribution on time, you must pay a 50% excise tax on the amount that should have been withdrawn. 

Because the old distribution rules were so complex, it was almost impossible for the IRS to enforce this 50% penalty. In addition to creating simplified rules for distributions, the IRS has created a new reporting system that will make it easier to enforce the rules. 

Banks, brokers, and other holders of retirement accounts will be required to report your minimum distribution to you and to the IRS. This will alert the IRS if you fail to make your distribution on time, so they can charge you the 50% penalty. 

While these new rules may make calculating your distributions simpler, other retirement plan rules remain complex, and they differ for each type of retirement plan. We are here to assist you with any of your retirement plan issues. For assistance, be sure to call us.