It’s a bitter irony that after years of slugging money into your tax-deferred retirement accounts (401(k)s, 403(b)s, Traditional IRAs, SIMPLE IRAs, SEP IRAs, 457s) and being told by the IRS that you CAN’T get the money out until you are 59 1/2, when you turn 70 1/2, the IRS tells you that you MUST take money out.
It’s like trying to eat healthy. Margarine is better. Now, it’s butter! Beef is bad! Beef is good! Carbs make you fat! Wait, you need to eat carbs so you don’t turn into an angry lunatic when your blood sugar crashes. Maybe that last part is just me.
That’s right folks, when you turn 70 ½, the IRS expects you to start withdrawing on your retirement accounts and paying all those taxes you didn’t pay while you were saving. Here’s how it works. Say you have $300,000 in tax-deferred accounts earning 6%/year on average. Your forced withdrawals could look something like this for the next 5 years.
| Age | Tax-Deferred Assets | IRS Life Expectancy Factor | Required Distribution |
| 70 ½ | $300,000 | 27.4 | $10,950 |
| 71 | $306,400 | 26.5 | $11,560 |
| 72 | $312,500 | 25.6 | $12,200 |
| 73 | $318,300 | 24.7 | $12,890 |
| 74 | $323,700 | 23.8 | $13,600 |
Now, of course, you can take MORE than this amount each year, but you must take at least this amount out of your tax-deferred accounts or face a 50% IRS penalty. That’s right five-0 percent for not taking enough out of your tax-deferred accounts.
This brings us (finally!) to the point of this blog. Roth IRAs are not required to have minimum required distributions taken out. Why? Because the withdrawals are tax-FREE so the government isn’t in a particular rush for you to tap these accounts. It doesn’t benefit the IRS, so you can keep your stinkin’ Roth money.
So, if you are sitting on a large pot of tax-deferred money that you are worried will become a tax headache starting in your 70s, maybe doing some Roth conversions beforehand makes sense. Roth IRA money grows tax-free until yours (and your spouse’s) death. Only when a non-spouse beneficiary inherits a Roth IRA are withdrawals forced to begin (see last week’s blog).
Remember, I said MAYBE. It’s important that you check with your CPA and financial adviser before considering paying the up-front tax bill required to move money from a tax-deferred to a Roth account.
Thanks for reading this series on Roth IRAs. Join me next time for some budget friendly summer activity ideas.
