Q: I turn 70-1/2 this year, so I thought I needed to figure out how – and how much – to take from my IRA to avoid any penalties. A friend of mine said I can wait until next year since this is my first distribution. I don’t need the money and would prefer to wait but I’ve heard the penalties are pretty stiff if you miss a distribution. Can I wait until next year and avoid any penalty since it will be my first distribution? Does my beneficiary designation affect the amount I must take each year?
April 1 of the year after the year in which you turn 70-1/2 is the required beginning date for IRAs. This is the very last day you can take your required minimum distribution and avoid a penalty. The penalty is stiff: In addition to ordinary income tax you will incur a 50 percent penalty if you fail to take your first and/or any future required minimum distributions in the year in which they are required. If you turn 70-1/2 this year, your required beginning date is April 1, 2014. If you wait and take your 2013 required minimum distribution in 2014, you will be required to take two distributions in 2014: your first required minimum distribution, and the required minimum distribution for 2014. This may place you in a higher tax bracket in 2014. Unless you have income this year from sources you will not have income from next year, you are probably better off taking your first required minimum distribution this year rather than delaying. If you are unsure of the tax impact of taking your required minimum distribution this year or waiting until next year, meet with a financial planner or tax professional.
The required minimum distribution amount is calculated by looking back to the previous year’s IRA account balance. Your IRA account balance as of Dec. 31, 2012, will be used to calculate your first required minimum distribution regardless of whether you take it this year or wait until 2014. The required minimum distribution for 2014 will be calculated based on the account balance as of Dec. 31, 2013. The account balance is divided by the life expectancy listed in the appropriate IRS life expectancy table. If you are married and your spouse is more than 10 years younger than you and the sole beneficiary of your IRA, you will use the joint and survivor life expectancy table. If you are unmarried or married and your spouse is not more than 10 years younger, or not the sole beneficiary of your IRA, you will use the uniform life expectancy table. The life expectancy from the uniform table for a person age 70 is 27.4. If this is the appropriate life expectancy table, you will take your account balance as of Dec. 31, 2012, and divide it by 27.4 to determine the amount of your first required minimum distribution.
Inherited IRAs are subject to different rules concerning required minimum distributions. The amount will be based on the beneficiary’s life expectancy using the IRS single life expectancy table. The calculation is the same whether or not the IRA owner dies before or after the required beginning date. Beneficiary-required minimum distributions from an inherited IRA must begin by Dec. 31 of the year after the death of the IRA owner. If an IRA owner dies after the required beginning date and has not taken the required minimum distribution in the year of death, this must be taken by the beneficiary. It will be taxable to the beneficiary, and if not taken, the amount that should have been distributed will be subject to the 50 percent penalty. If an IRA owner names someone other than an individual, such as a charity or their estate, the rules for required minimum distributions are different. If the IRA owner dies before the required beginning date, the funds will have to be distributed within five years of death. If the owner dies after the required beginning date, the funds must be distributed over the deceased’s remaining life expectancy or sooner.
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