If you are age 70-1/2 or older by the end of the year (December 31), the IRS requires you to take a required minimum distribution (RMD) from your tax-deferred retirement accounts such as traditional IRAs, SEP IRAs and 401(k) plans no later than New Year’s Eve. If you turned age 70-1/2 this year, you have the option to delay your first RMD until April 1 of the following year, but if you decide to do that, you will have to take two RMD’s in the same year which could increase your income taxes substantially.
If you inherit an IRA from your spouse you can wait until you reach 70-1/2 before taking required minimum distributions.
However, if you inherit an IRA from someone other than your spouse you must determine whether the account owner died before, on, or after his or her required beginning date (RBD):
• If the account owner died before the RBD, you may choose between two ways of calculating the RMDs—the life expectancy method or the five-year method.
• If the account owner died on or after the RBD, you must use the life-expectancy method.
The life-expectancy method requires that you withdraw certain minimum amounts annually according to calculations set forth by the IRS. You can always withdraw more than the required amount if you wish.
The five-year method requires that you receive all assets in the account no later than the end of the fifth year following the year of the account owner’s death. There are no minimum withdrawal requirements. You may withdraw assets at any time, as long you redeem the entire account by the end of the fifth year following the owner’s year of death. This option is only available if the IRA owner passed away before the RBD.
Your RMD is calculated using a “life expectancy” factor taken from IRS life expectancy tables. Non-spouse beneficiaries use the Single Life Expectancy Table, found in IRS Publication 590. If you are one of a group of beneficiaries, your RMD may be calculated using the life expectancy factor of the oldest beneficiary of the group.
If you withdraw less than the required minimum distribution, you will be subject to a federal penalty, which is an excise tax equal to 50% of the amount you should have withdrawn. This penalty is in addition to paying ordinary income tax on the amount you should have withdrawn.
Therefore you should keep a paper trail of all of your RMD distributions. Also keep a copy of any notice your brokerage firm sends you about the RMD for this year. This paper trail will be extremely helpful if you are audited or if you determine in the future that you did not withdraw enough money this year to satisfy the RMD requirement.
If you need any help calculating the RMD or have questions about how you can reduce your tax on the RMD, please call Gregory J. Spadea of Spadea & Associates, LLC at 610-521-0604, located in Ridley Park, Pennsylvania.