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No More IRA After 70-1/2
IRS rules state that contributions to any IRA retirement plan must cease when you reach 70-1/2. That is straightforward. The year you hit that magical age, your contributions to your IRA must cease, otherwise you will pay half of your excess contributions to Uncle Sam.
That has been the cutoff age since IRAs were created. Should the current congress make changes to Social Security, however—a questionable possibility—and change the retirement age to 70 as one proposal suggests, that cutoff age will certainly change to a higher one.
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There’s more to the 70-1/2 number than just cutting off your contributions. You must also begin taking out funds from your account. And that is NOT so straightforward. Like so many of the IRS regs, the distributions you take from your IRA account are based on an almost draconian formula that divides the balance in your account by an actuarial table of how long you should live. The IRS calls this your Required Minimum Distribution, or RMD. Here are the average percentages for certain ages:
- Age 70 27.4%
- Age 75 22.9%
- Age 80 18.7%
- Age 85 14.8%
- Age 90 11.4%
And that 70-1/2 age is also amorphous. The rules state you must begin taking funds out the year you hit the magic number OR April 1st the following year. So if you reach the magic age August 8 of this year, you can take your first RMD Feb. of next year, OR, wait until April 1 of 2013.
Ah, but the IRS is wise to such shenanigans. If you wait until April 1 of the following year, you must take both the 2012 and the 2013 RMD. That could have a negative impact on your taxes,
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Taking Your Lumps
You don’t have to take just the RMD. You can take more any time. You can even take it all out in one lump sum. Of course, this will hit you with a heavy tax burden. If you were born before 1936, you can qualify for 10 year forward income averaging, but you have long since passed 70-1/2, so that reg is not really relevant.
Still, there can be advantages to taking a lump sum distribution. If you have significant other investments, and sufficient income from them for your living expenses, you can plug your lump sum into some of your other investments.
You might consider using it to set up an annuity that will give you a guaranteed income for many years, perhaps life, depending on the amount of your distribution. Now if you search the internet, you will find several articles telling you annuities are bad things. But being a lifelong contrarian, and speaking from personal experience and that of several friends who have annuities, I have found them excellent investments. Mine, after four years of taking monthly income from it, remains worth almost the original investment.
So even though the contribution age limit for a simple IRA is 70-1/2, you don’t have to end your investment activities.
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Sources and Credits
Age limit: IRS http://www.irs.gov/publications/p590/ch01.html#en_US_2010_publink1000230725
Professional and personal knowledge and experience:
I am a former editor of The Financial Planner magazine and of Pension World magazine and the author of three books on financial and estate planning. As a fulltime freelance writer, I have been a regular contributor to numerous financial journals such as Trusts and Estates, National Real Estate Investor, Pension Management, Financial Planning and many others.
I have also been a regular contributor of financial articles to many other magazines including Career Pilot, Metro Realtor, The MoneyLetter, Atlanta Magazine and many others.
Holding money: personal clip art collection