Q: I keep hearing about taking minimum annual withdrawals from your IRA after you turn 70 and a half years old. But I'm not sure how it works. If I have $400,000 in my IRA when I'm 70 and a half, and I take out interest every month to live on, does that qualify as part of the minimum annual distribution requirement? I hope so! -- JP
A: Not to worry. Of course it does.
The law requires you to start taking minimum annual distributions from all your traditional IRAs after you turn 70 and a half years old. (The rule doesn't apply to Roth IRAs).
The government has waited a long time to start taxing this money, and it's not fooling around: There's a steep penalty for failing to take your annual RMD. The fine is equal to 50% of the amount you should have taken out of the IRA, but didn't. In other words, if your RMD was $1,000 and you didn't take it, the fine is $500.
In our hypothetical example, you'd use your total IRA balance on December 31 2020 -- the year before you turned 70 and a half. To find your life expectancy, you'd look at an IRS actuarial table called the Unisex Uniform Lifetime Table. You'll find it in the Appendix of IRS Publication 590, which you can download at www.irs.gov.
To keep things simple, let's round that up to $14,600.
Of course, you can withdraw a lot more than the minimum if you want. There’s no maximum distribution limit. But everything you withdraw is taxable income for the calendar year in which you take it.