When Do Required Minimum Distributions From an IRA Account Start?
For many individuals, IRA contributions are tax deductions during the working years and for all IRAs the account earnings accumulate tax deferred. In retirement, an IRA owner who has enough income may not want to withdraw from his IRA and incur extra taxes on the withdrawals. At a certain point, the IRS rules force an IRA owner to start taking a minimum withdrawal amount every year and pay taxes on the withdrawal.
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Start Date for Required Distributions
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The IRS rules dictate an IRA owner must start taking at least a minimum distribution each year in the year she turns age 70 1/2. The first required distribution must be withdrawn from the IRA to be included in taxable income by March 31 of the year following the year the IRA owner turned 70 1/2. The IRA owner can take a larger distribution than the minimum set by the IRA.
Follow-Up Required Distributions
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A required minimum distribution must be taken from an IRA each year after the owner reaches age 70 1/2. After the first distribution, which must be withdrawn by March 31, the following withdrawals must be completed by December 31 each year. In the first year after age 70 1/2, an IRA owner could end up taking two distributions, one by March 31 and the second by December 31.
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Calculating Required Distributions
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The required minimum distribution each year is calculated by taking the IRA account value at the end of the previous year and dividing a life expectancy factor. The life expectancy tables can be found starting on page 90 of the IRS Publication 590, Individual Retirement Arrangements. The most commonly used table is the Uniform Lifetime table on page 105. Each year a new minimum distribution is calculated using the previous year's end value and an new life expectancy factor.
Penalties
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If the required minimum distribution is not withdrawn by the required date or is not of the required amount, the IRA owner will incur a tax penalty. The penalty is 50 percent of the amount that should have been withdrawn as the minimum distribution. A larger distribution cannot be taken in one year to reduce the required amount for the next year. If a valid reason exists as to why the minimum distribution was not withdrawn on time, the IRA owner can submit a Form 5329 to the IRS and attach an explanation.
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