Required Minimum Distribution Method IRA

Required minimum distributions must be taken by every IRA participant starting at age 70 1/2

You've made it to age 70 1/2 and are enjoying your IRA funds. Unfortunately, the IRS is ready to enjoy some of your funds, too. By forcing IRA participants over 70 1/2 to remove money every year, the government finally gets the chance to tax these dollars you've sheltered. Rules were simplified several years ago to streamline the system, but you still want to do it right. Failure to remove enough money when taking distributions carries a 50 percent penalty.

History

When IRAs were created as part of the Employee Retirement Income Security Act in 1974, the government needed a method to remove and tax funds. Required minimum distribution rules--known as RMDs--outlined several specific methods IRA participants could choose to distribute monies beginning at age of 70 1/2. Rule changes in 2002 simplified the system for calculating RMDs. The new, simple rules have reduced the number of options to two while the participant is alive and one for inherited IRAs.

How It Works

After age 70 1/2, an increasing amount must be removed from your IRAs each year.

Starting the year taxpayers turn age 70 1/2, taxpayers are required to remove an increasingly larger amount annually from their IRA. IRA account participants must look up the total value of IRA accounts and remove a minimum amount each year. This amount is on charts available from the IRS and most IRA account trustees. In fact, many IRA trustees inform individuals of the amount they must remove as a courtesy. Ask your IRA trustee if they will compute your required minimum distribution or if you should consult a chart yourself.

Calculation

Ask your IRA trustee if he will calculate the required minimum distribution.

IRA account participants must calculate the total value of IRA accounts and remove a minimum amount each year. This amount is on tables available from the IRS and most IRA account trustees. As a courtesy, many IRA trustees inform individuals of the amount they must remove. Ask your IRA trustee if he will compute your required minimum distribution or if you should consult the tables yourself. Most people will use the Uniform Life Expectancy Table to find the percentage of assets required to be removed from an IRA. Persons with a spouse at least 10 years younger who is the sole primary beneficiary may choose to calculate from the Joint Life Expectancy Table.

Tax Reporting

IRA participants receive a 1099-R to list RMD income on a 1040 tax return.

As with any IRA distribution, you may choose to withhold funds from the annual distribution to pay taxes. You'll receive a 1099-R detailing the required minimum distribution and any withholding at year-end. Use this information to complete your 1040.

Fees

Firms may charge fees to sell assets in an IRA.

No fees are charged for required minimum distributions by the government, but if your account is invested in funds that must be sold to liquidate, there may be transaction or back-end fees. Sometimes these fees are waived in the case of required minimum distributions. Ask your IRA trustee if your account has fees to remove funds from your IRA.

Considerations

Coordinate required minimum distributions with your tax and estate plan.

Although required minimum distribution amounts were lowered several years ago, that doesn't mean you should remove only that amount. Money in an IRA when you pass away is taxed as income when taken out by beneficiaries, so it may make sense to discuss some tax planning with a tax adviser or estate attorney and remove more than the required minimum distribution.

References

• Congressional Budget Office: Legislative History of IRAs
• IRS: Retirement Plan FAQs Regarding Required Minimum Distributions
• Better Investing: Required Minimum Distributions
• Bankrate: Deadline Looms For Mandatory IRA Withdrawal

Resources

• IRS: Pub 590: IRAs, Appendix C