Q: I will celebrate my 70th birthday in August and know the time is drawing near that I will be able to take money out of my IRA. But I am a bit confused as to whether I should start taking money this year or next. Which year is it?
A: Your question was phrased in a way that makes me wonder if you want to take some of the IRA money sooner rather than later. I also have to assume that this is a traditional IRA not a Roth IRA. The tax laws surrounding IRAs and other benefit/retirement plans are very complex and the rules differ depending on the type of plan you have. For example, if it is a Roth IRA, there are no required distributions during your lifetime.
First, the general rule is that you can take penalty-free distributions from your traditional IRA as long as you have reached age 59½. Normally taking money out of your traditional IRA before you reach 59½ will result in a penalty of 10% of the amount withdrawn, although there are exceptions to this rule. (I will leave the discussion of early withdrawal penalties for another article.) The amount you take as a distribution is not limited, but it is reportable as income in the year withdrawn. If any of your traditional IRA investments were nondeductible, you have some tax cost or “basis,” and then a pro-rata portion of each withdrawal is nontaxable. But most have not made these nondeductible investments.
For your traditional IRA, you are required to begin receiving required minimum distributions (RMDs) in the year you turn 70½, your “required beginning date.” Be sure to get this date right since there are significant penalties (50 %!!) for failing to take the money when required. Since your 70th birthday is in August 2014, you will not be 70½ until February 2015. So you are not required to begin your RMDs until 2015.
But hold on! It can’t be that easy…right? There is an exception in the first year that allows you to defer the first RMD until any time before April 1 of the following year. So you have a choice of taking the first RMD in 2015 or waiting until sometime in the first three months of 2016. However, since this rule only applies to the first RMD, your normal RMD for 2016 will still need to be taken before the end of 2016. If you defer the first RMD, you will receive two distributions in 2016. Obviously you will need to determine the tax advantage or disadvantage of taking a distribution in both 2015 and 2016, or taking both in 2016. After the first distribution, the RMD must be taken each year.
Q: I have two IRAs, one I set up years ago and one that was set up when I retired and rolled my old 401(k) out of my employer’s plan. How do I calculate the amount I am required to withdraw?
A: Generally your RMD is calculated by taking the total value of each IRA on December 31 of the preceding year and dividing it by your distribution period as published by the IRS in the Uniform Lifetime Table. You can find this table at www.irs.gov in Publication 590, Appendix C. You aren’t required to take the calculated RMD out of each IRA. Instead you can take the total RMD out of a single account. This allows you to leave one of your IRAs intact and take a single distribution from the other.
As an example, let’s assume you are 73. Per the Uniform Lifetime Table your distribution period is 24.7. If your IRAs have values on December 31 of the prior year of $100,000 and $500,000, then the RMDs would be $4,049 and 20,243, respectively. The total of $24,292 can be withdrawn out of either or both accounts.
And now I need to mention some of the exceptions. For your lifetime distributions, if your spouse is more than ten years younger than you and is the sole beneficiary of your IRA upon your death, there is a “Joint Life and Last Survivor Expectancy” table that is used to determine your RMD amount. Also, if you inherited an IRA there are another set of RMD rules that apply. That is a topic for still another article.
To ensure compliance imposed by IRS Circular 230, any U.S. federal tax advice contained in this article is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed by governmental tax authorities. The answers in this column are meant to offer general information. You should consult your tax adviser regarding the specifics of your situation. Peter Robbins is a partner in the Boise office of CliftonLarsonAllen LLP, specializing in tax matters for small businesses, individuals, and trusts and estates. Have a question for Robbins? Email your question to firstname.lastname@example.org. Enter “Talking Tax” in the subject line.