Retirement funds in a traditional, SIMPLE or SEP IRA need to start being withdrawn annually at age 70 1/2. The Internal Revenue Service refers to this as the required minimum distribution, and failure to comply may result in significant penalties. Roth IRAs are exempt from required withdrawals while the account holder is alive. Employer-based plans, such as a 401(k), allow current employees over 70 1/2 to delay distributions until retirement, but IRAs forbid this exemption.
The withdrawal of funds must occur within a certain number of years. This is known as the distribution period, which is used to determine the minimum amount that will be redeemed annually. That amount will be the full value of the IRA account on Dec. 31 of the previous year that the holder reached age 70 1/2, divided by the number of years left in the distribution period.
In Publication 590, the IRS provides tables outlining distribution periods based on an account holder's circumstances. When the sole beneficiary is an account holder's spouse who is more than 10 years younger than the account holder, the Joint and Last Survivor Table determines the distribution period. The Uniform Lifetime Table applies to account owners with a spouse who is less than 10 years younger than the account holder or the spouse is not indicated as the sole beneficiary on the account. Those who have inherited an IRA account as its beneficiary can determine the distribution period with the Single Life Expectancy Table.
Withdrawals of more than the mandatory minimum are allowed, including a full distribution, but this may have negative tax consequences. Withdrawing more than is required can push an account holder into a higher tax bracket, although those with multiple IRA accounts might consider liquidating smaller accounts to simplify the distribution process.
Owners of multiple IRA accounts must calculate the minimum withdrawal necessary each year for every account they hold. However, it's not necessary to take a withdrawal from each IRA account. Multiple account holders can total the annual minimum distribution required from each account to arrive at the their annual minimum withdrawal requirement. It's then allowable to withdraw that money from one account or more than one account. As long as the mandatory minimum withdrawal is calculated based on the value of all IRA accounts owned, the requirement will be met and penalties avoided.
An account holder who does not withdraw the required minimum distribution, either fully or partially, can face a 50 percent tax on the amount that was not withdrawn. If the insufficient withdrawal can be shown to be the result of an honest mistake or error, and the account holder is taking action to remedy the situation, a waiver might be granted from the IRS. Account holders can use Form 5329 accompanied by a letter of explanation to apply for a waiver.
Wayne Marks has more than 20 years of experience in finance, education, public relations and marketing in both New York City and Washington, D.C. He has worked for corporate and nonprofit organizations and holds a certificate from the Wharton School of Business.