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How much should retirees withdraw from their traditional 401(K) or IRA?

By April 1 of the year following the year that you turn 70½ you must start taking the Required Minimum Distribution (RMD) from a traditional IRA or 401(k). The amount you must withdraw is determined based on your age and account value.

If you don’t take the required amount you are at risk of an excise penalty equal to 50% of the amount you should have withdrawn but did not. This is the simple part. The difficult part is the decision whether you should withdraw only the required amount or more.

Another challenging question is when to start making withdrawals. There is a 20 year gap between the age of 59 ½ when distributions are allowed and the age of 70 ½ when they become mandatory.

How do pension distributions get taxed? Tax Deferral Explained.

Except for funds saved in a ROTH IRA, money saved in Traditional IRA and employment retirement plans are pre-tax. At the time when contributions to the plan were made, your earnings contributed to the plan were tax free. The common agreement was to pay tax later on plan distributions. This principle is called “tax deferral”.

Importantly – the tax rate on pension distributions will depend on the total taxable income of the retiree. If total income is below the taxable level then plan distributions will remain tax free for the recipients.

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