February 22, 2024

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Confusion about minimum retirement fund distributions can cause costly mistakes

Confusion about minimum retirement fund distributions can cause costly mistakes

Dear Liz: When my wife reached age 59.5, we began required minimum distributions to all of her retirement funds.

During this process, the investment company representative stated that as long as she was still working and contributing to the 401(k) and 403(b) at the business, she was not required to take RMDs for those accounts. With all the recent changes to these types of accounts, is this still the case or has the law changed?

Answer: Minimum distributions have never been required at age 59½ from any retirement fund. This is the age at which people no longer have to pay penalties to access their retirement funds, not the age at which they should start withdrawing money.

The current age at which minimum retirement distributions must begin is 73, rising to 75 for people born in 1960 and later. If your spouse is still working at that point, she can defer RMDs from retirement plans sponsored by her current employer. RMDs will still be required in other retirement accounts, such as IRAs and 401(k)s or 403(b)s from a former employer. The other RMD exception is for Roth accounts, which do not have RMDs for the account owner.

In general, you want money to remain in tax-deferred retirement accounts as long as possible. Unnecessary distributions increase your tax bill and can reduce the amount you have to live on later in life.

If your spouse has already taken a distribution, she has 60 days to roll it over to an IRA and avoid taxes.

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Tax law can be confusing and mistakes can be costly. Please use this experience as a reason to hire a good tax professional who can answer your questions and ensure you don’t make another potentially costly mistake.

Liz Weston, Certified Financial Planner, is a personal finance columnist NerdWallet. Questions can be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “contact” form at asklizweston.com.