Money Matters

Money Matters: Tips for calculating when to take IRA distributions

CorrespondentSeptember 28, 2013 

Q. I was born Oct. 28, 1943 and want to know the earliest date when I must start taking my (required minimum distribution)? Is it April 1 of 2014? Also, I have multiple IRA accounts (a stock/mutual fund account and an annuity) and have been told that I can take the total RMD for both accounts from just one account. Is that correct? I’m leaning toward taking it all from the annuity due to the higher internal costs of the annuity versus my stock account. I’d transfer out of the annuity to a regular IRA, but it is a recent purchase and subject to surrender charges (other than RMDs). What’s the calculation for the RMD? I know you’ve answered similar questions in previous columns, but I didn’t save a copy.

A. You’re almost right about the dates, just off a year. You may want to clip this column out and put it with your IRA investment file. April 1 of the year following the year in which you turn 70½ is the required beginning date for IRAs. This is the very last day you can take your required minimum distribution from your IRA 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 RMDs in the year in which they are required. Since you don’t turn 70½ until next year, your required beginning date is April 1, 2015. If you wait and take your 2014 RMD in 2015, you will be required to take two distributions in 2015, your first RMD and the one for 2015. This may place you in a higher tax bracket in 2015. If you decide to take your RMD when you turn 70½, you will take it before Dec. 31, 2014.

The RMD amount is calculated by looking back to the previous year’s IRA account balance. Your IRA account balance as of Dec. 31, 2013 will be used to calculate your first RMD regardless of whether you take it in 2014 or wait until 2015. The RMD for 2015 will be calculated based on the account balance as of Dec. 31, 2014. 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 he or she is the sole beneficiary of your IRA, you will use the Joint and Survivor life expectancy table. If you are unmarried, married and your spouse is not more than 10 years younger, or your spouse is 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, 2013 and divide it by 27.4 to determine the amount of your first RMD.

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. You need to contact the person from whom you bought the annuity or contact the issuing company directly and ask about surrender charges. Most annuities allow an annual 10 percent surrender free withdrawal. If your total RMD for all IRAs exceeds that amount, you may face a surrender charge. Technically, if you take the total from the annuity, you’d be taking your RMD but not based on that account balance.

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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