Distribution age a key to retirement accounts

Everyone with a retirement account should keep an eye on 70½. That’s the quirky age when investors typically must start pulling money out of individual retirement accounts and workplace 401(k)-style plans – or face the consequences.

There are exceptions, such as if you’re still working and participate in a 401(k) program, but the general rule is to start making withdrawals after hitting 70½. Failure to pay heed can mean a 50 percent tax penalty on the amount that was supposed to be withdrawn but wasn’t.

President Trump recently ordered a review of “required minimum distribution” rules, specifically asking the Treasury Department to consider adjusting the amounts people must withdraw each year after hitting 70½. It’s one of several actual or potential tax changes Americans should be watching.

The rule that kicks in after 70½ applies to tax-deferred accounts including traditional IRAs and 401(k) plans on which people paid no taxes when they contributed money and haven’t yet paid taxes on accrued earnings.

The rules are designed to “make sure that these plans are used to fund the owners’ retirement rather than the heirs’ inheritance,” Richard Kaplan, a law professor at the University of Illinois, said in a recent commentary.

The RMD rule doesn’t apply to Roth IRAs, as these plans are funded with after-tax contributions. Roth withdrawals can be delayed until the account owner’s death.

After hitting 70½, investors with traditional IRAs and 401(k) plans must pull out a portion of their account and pay taxes on the proceeds. The yearly withdrawal amounts, based on a government life-expectancy schedule, rise each year, meaning higher and higher distributions.

Trump has ordered the Treasury Department to review that schedule with an eye on lowering the required withdrawal amounts to reflect slightly longer life expectancy. That would result in slightly smaller yearly required withdrawals.