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Required Minimum Distribution 401k Limits

Jul 12, 2008
When it comes to retirement planning, saving for retirement is more important than ever, this day and age. Inflation and the uncertainty of Social Security income point towards the seriousness of our economic situation. The only way we can have a certain comfortable retirement is to take these matters into our own hands, rather than relying on what worked for others in the past. One of the most obvious ways to do this is to invest in a retirement plan, like an individual retirement account, IRA, or 401k retirement plan. After contributing to these plans over the years there will come a time when we are required to make withdrawals, this is called Required Minimum Distribution, or RMD.

Once reaching a particular age (currently age 70 ) Required Minimum Distribution is mandatory according to the Internal Revenue Service (IRS). These mandatory withdrawals are required each year and every year, allowing the IRS to collect taxes from the distributions of retirement accounts. These are made mandatory by the government, because contributions either to a 401k or an IRA were made with before tax dollars. Initially, you're encouraged to save for retirement with an IRA or 401k deduction with the assumption that taxes are deferred until Required Minimum Distribution. This may not sound like the best deal in the world, but the benefits from tax-deferred growth are substantial over time. The only real way to avoid Required Minimum Distribution would be to set up an initial investment and Roth 401k or Roth IRA.

Now, when you begin your initial investment in either an Individual Retirement Account or a 401k, you can't just submit a substantial amount of money and defer it from tax. If this were the case, it would be too easy to put large amounts of money away and avoid having to pay taxes. So, the government puts limits on the amount of money we can put away in our retirement plans. 401k limits and IRA limits increase with each and every year, as the cost of living rises. If you're fortunate enough to have a 401(k) available to you at your workplace, you should definitely take advantage of it. Not only will you likely receive a match from your employer, but 401k limits are often substantially larger their IRA counterparts. Currently (for 2008), IRA contribution limits are a maximum of $6,000 inclusive of the 50 and older catch-up provision. Where as, current 401k limits are set at $20,500, inclusive of the 50 and older catch-up. If you are below 50 for either, the amount is $5,000 for the IRA account and $15,500 for the 401k retirement plan. This may not sound fair to those that don't have access to a 401k retirement plan, but it should provide more urgency for those whom are left out.

401k or IRA withdrawals are not just taken via required minimum distribution, however. You can take a qualified plan withdrawals at age 59 1/2, and the funds will be taxed at that time. Qualified accounts taken before 59 1/2 will be subject to early penalty in taxes. As far as the required minimum distribution amount, at age 70 1/2 this currently works out to be about 3.65%, based on life expectancy tables. As you age, this percentage increases, so at age 90 for example, the percentage is currently 8.77%. For obvious reasons, the government wants to get the taxes out of you before you die. Make sure to work with a qualified financial planner. When determining your specific required minimum distribution or 401k is limit, as these both involve very important tax and retirement planning issues.
About the Author
If you would like more information on how Required Minimum Distribution works you can visit the site for more details. You can also find more on specific 401k Limits and how they might affect your unique situation.
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