I do not understand this rule: "IRA confiscates half of your account if you do not make your withdrawals by 70.5 years of age".
Why? What does it mean to make withdrawals? Just to request your money getting transferred to your bank account? or get monthly check?
And why would someone take half of my savings if I don't start withdrawing my money by the time I am 70.5 years old?
According to the link below, it does appear that you must take an RMD, or Required Minimum Distribution, from your IRA at age 70½, or face a 50% penalty of the RMD AMOUNT that has NOT been taken, which is going to be much less than 50% of your entire account balance.
Why specifically this happens would be opinion based on my interpretation of the reasoning behind those that enacted the law.
I can tell you penalties like this are used to encourage behavior - you can't just leave your money in a tax-free account forever. The IRA is meant to help you build your savings for retirement, and at age 70½ you should be ready for retirement.
This means you must begin withdrawing the money - but that doesn't mean you have to spend it.
In the link below, there are outlines on what you can do to satisfy the required minimum distribution.
As it specifies, you can take one lump sum, or spread it out over multiple payments, and there's a calculator to identify what your RMD will be.
As noted in the linked page, you DO NOT have to take an RMD on a Roth IRA. If this is important to you, you may want to consider Rolling Over your current IRA to a Roth.
You elected to defer paying taxes by contributing to an IRA. Lawmakers simply want to make sure that they collect those taxes by requiring you to either withdraw the money (incurring a tax liability) or pay a penalty (tax).
In reference to the original question:
You put pretax (untaxed) money into an IRA. If this was a rollover from a company plan (like a 401k), your company may have also put pretax dollars in. As the account grows, you get gains on all of this money. The government gives you this amazing deal because they want you to save for retirement. But, they also want you to eventually spend the money in retirement and they want to collect those deferred taxes. So they require RMDs starting at age 70.5. To guarantee that people follow the rules, they make a stiff penalty for not doing so.
The IRS has the option to forgive a forgotten RMD distribution penalty, if you can convince them that it was a true oversight and not a deliberate flouting of the rules.
I'm a series 24 securities principle and have explained and trained people on questions like these more times than I can count. Although, my first recommendation is to speak to a qualified tax professional for the appropriate answer for each individual scenario.
Disclosure aside, the source of truth for these questions is always the IRS publications. In this case it's IRS pub 590b: When Must You Withdraw Assets? (Required Minimum Distributions).
IRA stands for Individual Retirement Arrangement. Basically it's an arrangement between you a the government to encourage retirement savings. Tax payers(up to a define taxable income amount) agree to receive a deduction during your working years lowering your taxable income in the present. Your taxable income should drop in retirement because you're not working anymore and any withdraws would most likely be taxed at a lower rate. To be clear the require minimum distribution is based on a life expectancy factor and the ending balance of your pre-tax retirement accounts from the prior year(for ex. 2016 ending balance for a 2017 rmd). The rmd works out to be somewhere around 3-4% of your total balance.
Most retirement account providers(if not all) have established several conveniences to automate the withdraw process. I've believe that moving funds directly to bank deposits or moving the funds to another taxable investment account are most common.
Retirement account providers are required by law to give you notifications about RMDs. Some big firms allow you to setup an auto-distribution a year before you turn 70.5 to start when they need to. Because of the 50% penalty you're given so many notifications about an RMD that it's hard to forget about it.
There is no federal inheritance tax. The federal estate tax, currently, exempts the first 5.49 million (US citizen spouses even avoid this). Current law also does a stepped up basis on inherited assets which were bought with after tax money. Example: Dad bought a house years ago for 100k. He dies and leaves it to JJ along with other assets worth $100k (well below the federal estate tax level). JJ sells the house for $400k which was its market value on the day dad died. He gets to keep the entire $400k. Note: Current government wants to eliminate the estate tax AND the stepped up basis. In above case, JJ will now have $300k gains on the house sale and will pay income tax on that! He will end up with much less that $400k.
