Now that the New Year is here, you can begin taking your required minimum distribution (RMD) for 2011. The following is an overview of the rules regarding these mandated distributions for older taxpayers.
The IRS does not allow IRA owners to keep funds in a Traditional IRA indefinitely. Eventually, assets must be distributed and taxes paid. If there are no distributions, or if the distributions are not large enough, the IRA owner may have to pay a 50% penalty on the amount not distributed as required. Generally, required distributions begin in the year the IRA owner attains the age of 70½.
Beginning Date Requirement - IRA owners must take at least a minimum amount from their IRA each year, starting with the year they reach age 70½.
A taxpayer who fails to take a distribution in the year age 70½ is reached can avoid a penalty by taking that distribution no later than April 1st of the following year. However, that means the IRA owner must take two distributions in the following year, one for the year in which age 70½ is attained and one for the current year.
If an IRA owner dies after reaching age 70½, but before April 1st of the next year, a minimum distribution is not required because death occurred before the required beginning date.
Multiple IRA Accounts - For purposes of determining the minimum distribution, all Traditional IRA accounts, including SEP-IRAs, owned by an individual must be taken into consideration. The required minimum distribution must be determined separately for each account. However, the amounts can be totaled and distribution can be taken from just one of the accounts or it can be taken from any combination of the accounts. If the owner chooses not to take the minimum distribution from each account, it is not uncommon for IRA trustees to require written certification that the owner took the minimum distribution from other accounts.
Determining the Distribution - The minimum amount that must be withdrawn in a particular year is the value of the IRA account divided by the number of years the IRA owner is expected to live.
- Determining Value: The value of each Traditional IRA is based on the IRA’s value at the end of the business day on December 31st of the PRIOR year. Generally, IRA account trustees will provide this information on the year-end statements or on IRS Form 5498.
- Determining the Distribution Period: The IRS provides two tables for use in determining the IRA owner’s life expectancy (referred to as “distribution period” by the IRS). Generally, IRA owners will use the “Uniform Lifetime Table” to determine their “distribution period.” If the IRA owner’s spouse is the sole beneficiary (on all the IRA accounts), the Joint and Last Survivor Table may be used. However, the Uniform Lifetime Table will always produce the smallest minimum distribution, unless the spouse is more than 10 years younger than the IRA account owner. Example: The IRA owner is 75 and from the “Uniform Lifetime Table,” the owner’s life expectancy is 22.9 years.
- Determining Age: Use the owner’s oldest attained age for the year of the distribution. Example: Suppose an IRA owner takes a distribution in February, when the owner’s age is 74, but later in November, turns 75. For purposes of determining the owner’s life expectancy, the oldest attained age for the year, 75, would be used in computing the minimum distribution. The same rule is used for the spouse beneficiary, if applicable.
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