Money Matters

How to calculate your IRA’s required minimum distributions

March 31, 2013 

Q. I follow “Money Matters” regularly. Two questions about required minimum distributions (RMDs) I haven’t seen addressed anywhere.

1) If an account contains both pre-tax & post-tax contributions, is RMD calculated on only the pre-tax component plus employer contributions & earnings or the total amount?

2) Can withdrawals of post-tax amounts count toward RMD?

To be more specific: account A is an IRA with mixed contributions; account B is a traditional IRA with pre-tax contributions only. How do I determine RMD? Can withdrawal of my post tax basis amounts from A be used to cover RMD for both A & B and then no tax owed for that year?

A. The RMD will be based on the total amount. Age 70 1/2 or April 1st of the year following age 70 1/2 is when required minimum distributions (RMDs) begin. If you wait until April 1st of the following year, two distributions will be required that year. The one for the previous year must come out by April 1st and the second must come out by December 31st. RMD is the amount an owner of an IRA is obligated to take out; ordinary income taxes are generally owed on this amount. Unless you are currently working for the company, any funds in company sponsored retirement plans are also subject to the RMD rules. If you are 70 1/2, still working for the company and not more than a 5 percent owner, the RMDs from that employer’s plan can be delayed until retirement. The RMD is calculated by dividing the appropriate account balances as of December 31st of the preceding year by the corresponding life expectancy from the Internal Revenue Service life expectancy tables. If your spouse is more than 10 years younger you use the joint life expectancy table, all others will use the IRS single life expectancy table. Any RMD not taken is subject to a hefty 50 percent IRS penalty. All banks, brokerage houses, mutual funds and other retirement plan providers have to report minimum required distribution amounts to both the taxpayer and the IRS. You can take your RMD from one or several accounts as long as the amount taken is based on the total of all applicable accounts.

If you have made non-deductible contributions to an IRA you have basis. You should have filed form 8606 in any year a nondeductible contribution was made. You cannot chose to withdraw the nondeductible contributions before taxable contributions and earnings for any reason (RMD, Roth Conversion normal distribution etc.). The value and basis of all IRAs are combined to compute the non-taxable portion of the distribution, based on a pro rata allocation. Example: The total of all of your account values on December 31st prior to the year in which you turn 70 1/2 equals $300,000, $50,000 of which is from non-deductible contributions. If your RMD is $10,949, 17 percent of this would not be subject to tax and the remainder would be subject to ordinary income tax.

Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624

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