Here’s a timely reminder for older business owners: Don’t forget to take required minimum distributions (RMDs) from company retirement plans and IRAs this year.
Alert: You generally have until Dec. 31, 2010, to complete RMDs. Otherwise, you’ll be hit with a whopping tax penalty equal to 50% of the required withdrawal amount (or the difference between the required amount and any amount actually withdrawn).
Generally, you must begin taking RMDs by April 1 of the year after the year you turn age 70½. And withdrawals must be made for each succeeding tax year. A recent tax law change waived the mandatory distributions from defined contribution plans and IRAs, but only for the 2009 tax year. So you can’t skip out on 2010 distributions.
The RMD for qualified retirement plans and IRAs is based on your life expectancy under special IRS tables and the value of your account on the last day of the previous year. In other words, RMDs for the 2010 tax year are figured on account balances as of Dec. 31, 2009.
Note: There’s a limited exception for individuals over age 70½ who are still working full time. In this case, you don’t have to take annual RMDs from the company retirement plan. But the exception doesn’t apply to individuals who own 5% or more of the business.
Tip: In any event, you must take required IRA withdrawals for 2010. The exception for individuals who are still working after age 70½ doesn’t apply to IRAs.