Many Massachusetts residents spend years building their retirement accounts. For those who did so through employment, the funds put into the account received tax-deferred status. That is, until withdrawn. Most people understand that the IRS could penalize them for withdrawing funds too early, but that may not be the only source of potential penalties.
Failing to make withdrawals by a certain age could incur a penalty as well. The IRS requires individuals to make their first required minimum distribution by the time they reach the age of 70 1/2. The first withdrawal must occur by April 1 after reaching that age. Thereafter, an individual must take a distribution each year by Dec. 31. If you continue working after reaching this age, you must begin the distributions in this manner the year after you retire.
The other exception to this rule is a Roth IRA which is funded with after-tax dollars unlike an employment retirement account in which contributions are made with pre-tax dollars. However, if a Massachusetts resident inherits a Roth IRA, he or she must follow the same rules as those with employment retirement accounts. These are the rules now, but the IRS is considering increasing the age at which those first distributions must be made.
What people reaching this point need to know is how much they will owe when they begin taking distributions from their retirement accounts. People who fail to take the required distributions will also need to know what penalties they may face. In order to plan for taking distributions, it may help to sit down with a tax attorney who understands the IRS requirements under the circumstances.