You must pull money out of your IRA after you reach age 70 1/2. View these short videos for an overview.
I want to introduce the four video segments that are available on our web site regarding required minimum distribution. The rules are quite simple. Once you've achieved age 70 and one-half, the government requires that you begin changing distributions from your traditional IRA on a regular basis based on your life expectancy. If you fail to take these distributions on a timely basis, you may be assessed a penalty equal to 50 percent of the amount you should have taken out on a timely basis. Please note that these rules do not apply to Roth IRA’s and that we are only speaking about rules that apply to traditional IRA accounts in the following videos. These are generally IRA’s that you funded in past years and for which you were able to take a tax deduction. The rules here are relatively direct but can be a little bit confusing, so if you don't want to make mistakes in this area, I invite you to view the videos that follow. If you feel you need additional clarification, email me at gary @trustedfinancial.com. Thanks.
Required Minimum Distributions Part 1 - When and How
If you own a traditional IRA, it is held in your single name, under your social security number. Your spouse may also have an IRA under her or his social security number. For purposes of the required minimum distribution, each IRA is treated in isolation. As each of you reaches age 70, you need to pay attention to the rules. The federal and state governments say that in the year you become 70 1/2 , that is six month after your 70th birthday, you need to begin taking withdrawals from your IRA. Even if you don't need or want to take out this money, they require the withdrawal because each withdrawal from a traditional IRA is considered a taxable distribution. In short, the government wants to begin taxing you on a portion of your IRA and they require regular minimum annual distributions from your IRA. There are very specific rules about taking these withdrawals, and if you fail to take the withdrawals, or fail to report the withdrawal on your Form 1040 tax return, they have a severe penalty, 50 percent of the amount that was not withdrawn becomes an additional tax penalty. Now the basic approach to this is that the government publishes life expectancy tables. You use these tables to calculate how much you need to take out each year. Now, when you take the distribution you're supposed to report it on your Form 1040 tax return on Line 15A. Simultaneously, the custodian who handles or holds your IRA money; a bank, a brokerage firm, etc., has to report to the IRS that a distribution was taken. If the IRS does not see a report from you, and they do receive a report from your custodian, there’s a good chance that they're going to come knocking and asking questions, and you really don't want that to happen.
Required Minimum Distributions Part 2 - The Uniform Life Expectancy Table
How exactly do you calculate the amount you must take to meet your required minimum distribution? There are tables that are issued by the IRS and you must use one of them to make this calculation. Most people are going to use something called “table III, uniform life expectancy table”. It's a simplified joint life expectancy table and it's usually used by people who are married and have a spouse who is no more than 10 years their junior, also used by single people, and by widows and widowers. For this illustration, I'm going to assume that you qualify to use the uniform table and let's also assume that you only have one IRA account. If you have more than one IRA account, take a look at the last video in this series for how they are handled. What is the correct IRA value to use as a basis for calculation your required minimum distribution? You must use the value that begins on December 31 of the year prior to the year in which you turned aged 70 and a half. If you turned 70 and a half in November 2010, for example, you would go back and look at the account value for your IRA on December 31, 2009. This is normally reported to you on a brokerage or bank statement for the month of december. Let's say, in this example, that your IRA at that time was worth $274,000.00. The next step is to take a look at the uniform table. You can find it in irs publication 590 or at their web site, www.irs.gov. You can get to their web site by going to the “useful links” in the little brown box on the right side of the first page of our web site, and then looking under “IRS Retirement Publication. On the uniform table, under age 70, you will see that the life expectancy that the IRS assigns to a person who is age 70 is 27.4 years. You will divide that life expectancy figure into the value of your IRA on the previous December 31, $274,000.00, and in this example you would come up with a figure of $10,000.00. Now this gets slightly more complex or confusing if you're born in the second half of the year. Let's say you were born in August 1940, so you will be 70 in august 2010, and thus will become age 70 and a half in the next calendar year, February 2011. The rules say you must take your distribution in 2011 based on the value of your IRA at December 31, 2010. If this is confusing, listen to the video once again, and then go on to the following videos which may offer additional clarification.
Required Minimum Distributions Part 3 - Joint and Survivor Table
In the last video, I explained how you calculate the amount that needs to be taken out each year using the so called uniform life expectancy table,table iii, which applies to most people: that is married, single and widowed people. However, there is another table that you may want to use if you are married to a spouse who is more than 10 years you're junior. This is table ii. Here the irs calculates life expectancy based on the actual attained ages for each of the spouses, and you come up with a calculation that is quite often more favorable than when you use the uniform table. Let me give you an example. Let's say that you are age 70 and your spouse is age 55. You go to the table and look up the respective ages on a grid, and you'll come to a cell that says 31.1. This means that the IRS assigns a joint life expectancy of 31.1 years. Now think about this, when you divide 31.1 years into the value of your IRA, rather than 27.4 years, which is the figure you would get from the uniform table iii, you obtain a smaller amount. Using the previous example of an IRA balance of $274,000, when divided by 31.1 years this results in a required minimum distribution of $8,810 and that is the amount that you have to take out of your IRA. Compare this to the $10,000 you would be required to take out if you used table iii. If you take less out of your IRA you have less taxable income to report, so there is some advantage to being married to someone who is considerably younger than you, because it leaves more money in your IRA to continue to grow tax sheltered, as well as avoiding some taxes in the current year. Now ladies, I'm not suggesting that you trade in your husband for a younger model just to save money on taxes, but if he has not taken out the garbage, or he keeps the volume on the television too loud, well, now you have another reason to send him packing! Now there are some other questions and issues that I often deal with that are discussed in the next video, so i invite you to go on and listen.
Required Minimum Distributions Part 4 - Exceptions to the Rules
Here I'm going to briefly deal with some exceptions to the general rule that when you turn 70 and a half, you must begin taking distributions regularly from your IRA and paying taxes on the money that is distributed. I’m also going to answer a commonly asked question about the subject. I've already mentioned in an earlier video that for the very first year in which you are required to take a distribution, normally you would have to take the money by December 31. However, the rules allows you to be a little late in the first year. Knowing that this is something that may be overlooked by some taxpayers, your are allowed to miss the December 31 deadline, and you are given a grace period until April 15 of the following year. That is the tax reporting deadline for the year in which you were supposed to have taken your required minimum distribution. There's another exception you might want to know about, and this applies more to qualified plans. Normally, if you have money sitting in a qualified plan such as a 401K, or 403B, or a 457 plan, and you're retired, the required minimum distribution rule applies to that money as well as to your IRAs, but if you are still working, and you are still making contributions to a 401K, for example - at your employer, you do not have to take your required minimum distribution on that money. This does not in any way exempt the IRA’s you may own, and applies only to employer sponsored qualified plans. Here’s a question i often get, “if i have more than one IRA, do i have to take money out of each of my IRA accounts after age 70 1/2? The short answer is “no”. You must include all of your IRA’s for the purpose of calculating the amount you must withdraw, and you must take the correct amount out each year, but it does not have to be taken out proportionally from each IRA. You can simply access one of the IRA’s to make the required minimum distribution. Here’s yet another question I hear occasionally: people will ask me if they can take a distribution in the form of stock. The answer is no, IRA distributions must be in the form of cash. Remember too, all distributions are fully taxable as ordinary income, they are not long term capital gains.
I hope you have learned a few things from this series of brief video reports on required minimum IRA distributions. If you have a specific question that applies to your situation, I invite you to contact me personally at 949-249-2057 or e mail me: gary @trustedfinancial.com.