Minimum Required IRA Distributions
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, distribution begins in the year the IRA owner attains the age of 70½.
If a taxpayer fails to take a distribution in the year they reach 70½, they can avoid a penalty by taking that distribution no later than April 1st of the following year. However, that means the IRA must take two distributions in the following year, one for the year in which they reached age 70½ and one for the current year.
If an IRA owner dies after reaching age 70½, but before April 1st of the next year, no minimum distribution is required because death occurred before the required beginning date.
For purposes of determining the minimum distribution, all Traditional IRA accounts owned by an individual are treated as one and the minimum distribution 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The minimum amount that must be withdrawn in a particular year is the total value of all IRA accounts divided by the number of years the IRA owner is expected to live.
Example: The IRA account owner is age 75 and the owner’s spouse, who is the sole beneficiary of the accounts, is age 72. Since the spouse is less than 10 years younger the IRA account owner, the Uniform Lifetime Table will produce the smallest required distribution. From the table, we determine the owner’s life expectancy to be 22.9. The owner has three IRA accounts with a combined value of $87,000 at the end of the prior year. The minimum distribution is $3,537 ($87,000 / 22.9).
UNIFORM LIFETIME TABLE – The following table is the one that is generally used to determine the Required Minimum Distribution from Traditional IRA accounts. Not illustrated, because of the size, are the Joint and Survivor Life Table used to determine RMDs when the sole beneficiary spouse is more than 10 years younger than the IRA owner and the Single Life Table used for certain beneficiary RMD determinations For table values not illustrated, please call this office.
UNIFORM LIFETIME TABLE
TIMING OF THE DISTRIBUTION
The minimum distribution computation determines the amount that must be withdrawn during the calendar year. The distributions can be taken all at once, sporadically or in a series of installments (monthly, quarterly, etc.), as long as the total distributions for the year are at least the minimum required amount.
Amounts that must be distributed (required distributions) during a particular year are not eligible for rollover treatment.
There is no maximum limit on distributions from a Traditional IRA and as much can be withdrawn as the owner wishes. However, if more than the required distribution is taken in a particular year, the excess cannot be applied toward the minimum required amounts for future years.
Distributions that are less than the required minimum distribution for the year are subject to a 50% excise tax (excess accumulation penalty) for that year on the amount not distributed as required.
Example: The owner’s required minimum distribution for the calendar year was $10,000, but the owner only withdrew $4,000. The excess accumulation penalty is $3,000, computed as follows: 50% of ($10,000 - $4,000).
If the failure to withdraw the minimum amount or part of the minimum amount was due to reasonable error, and the owner has taken, or is taking, steps to remedy the insufficient distribution, the owner can request that the penalty be excused. However, the penalty must first be assessed and then refunded by the IRS if the request is approved.
NOT REQUIRED TO FILE
Even though the IRA owner is not required to file a tax return, they are still subject to the minimum required distribution rules and could be liable for the under-distribution penalty even if no income tax would have been due on the under-distribution.
DEATH OF THE IRA OWNER
If the IRA owner dies on or after the required distribution beginning date, a distribution must be made in the year of death, as if the IRA owner had lived the entire year. If the distribution is after the owner’s death, the minimum amount must be distributed to a beneficiary.
When an IRA owner dies after beginning the required distributions and the beneficiary is an individual, the beneficiary must begin taking distributions the year after the IRA owner’s death as follows:
Spouse as Sole Beneficiary: The IRS permits a sole beneficiary spouse far more options than it does other beneficiates. When the spouse is the sole beneficiary the spouse has the following options:
The choice depends on the surviving spouse’s financial needs and goals and in most cases requires careful planning.
Caution: The sole beneficiary requirement is not met if the beneficiary is a trust, even if the spouse is the sole beneficiary of the trust.
Other Individual Beneficiaries: If the beneficiary or beneficiaries include individuals other than the spouse, then the first required distribution is the calendar year following the year of the IRA owner’s death. Using the Single Life Table, the post-death distribution period used to determine the RMD is the longest of:
1. The remaining life expectancy of the deceased IRA owner using the deceased’s attained age in the year of death and subtracting one for each year subsequent year after the date of death.
2. The remaining life expectancy of the IRA beneficiary using the beneficiaries attained age in the year of death and subtracting one for each year subsequent year after the date of death.
The beneficiaries’ remaining life expectancy is determined using the oldest beneficiary’s age as of their birthday in the calendar year immediately following the IRA owner’s death or for those accounts that were separated by the end of the year after the year after death, the age of each beneficiary. Where the beneficiaries include the spouse, account separation must be completed by September 30th instead of year-end to take advantage of the spouse sole beneficiary provisions.
5-Year Option: A beneficiary, who is an individual, may be able to elect to take the entire account by the end of the fifth year, following the year of the owner’s death. If this election is made, no distribution is required for any year before that fifth year.
The above rules apply only to distributions where the beneficiaries are all individuals and occur after the IRA owner has begun or is required to begin minimum IRA distributions. For distribution options for non-individual beneficiaries or for distribution options where the IRA owner dies prior to beginning the required minimum distributions, please call this office.
PLANNING CAN MINIMIZE THE TAX
Advance planning can, in many cases, minimize or even avoid taxes on Traditional IRA distributions. Often, situations will arise where a taxpayer’s income is abnormally low due to losses, extraordinary deductions, etc., where taking more than the minimum in a year might be beneficial. This is true even for those who may not need to file a tax return but can increase their distributions and still avoid any tax. If you need assistance with your planning needs, please call this office for assistance.