Q. I handle all of my own investments and I’m a bit confused about my required distributions from my IRA. I will turn 70 in November and my wife is seven years younger. I have an inherited IRA from which I’ve been taking distributions for over 10 years. I was told to use the Single Life Expectancy Table to determine the amount I must withdraw.
I’ve been told by friends that there are two other tables that can be used for noninherited IRAs, the Uniform Lifetime Table and the Joint Life Expectancy Table with the latter being the more advantageous if we don’t need the cash flow. Is there any downside to using the Joint Table, and can I use that for my inherited IRA now that I’ll be 70 1/2? Also, it appears that I can delay my distribution from my noninherited IRA until 2016. Doesn’t that make sense? I don’t need the money due to my pension and Social Security, so why pay taxes until I have to?
A. I’ll provide some basic information about required minimum distributions and life expectancy tables, but hiring a tax professional or a financial planner to help you with your first distribution may be wise. There are three life expectancy tables and different situations determine which table you should use to calculate your required minimum distribution. You are always allowed to take a higher amount than the required minimum distribution from an IRA, but you must take the required amount on time. Any amount that is not distributed that should have been is deemed an excess accumulation and subject to a steep 50 percent IRS penalty.
The first distribution year is the year in which you turn 70 1/2, in your case 2015. You are correct that the IRS allows a three-month grace period for the first required minimum distribution. Therefore, you can delay the first distribution to April 1 after the year in which you turn 70 1/2.
This three-month grace period is only for the first required minimum distribution. Future required minimum distributions must be taken by Dec. 31 of each subsequent distribution year. Your 2016 required minimum distribution must be withdrawn by Dec. 31, 2016. Delaying your first required minimum distribution may increase your tax liability since you will owe taxes on both the 2015 and the 2016 withdrawals in the same year.
The required minimum distribution is determined by using the appropriate life expectancy table and the value of your accounts as of Dec. 31 of the year prior to the required minimum distribution year. New life expectancy tables were mandated by the 2001 Tax Act. These newer tables are based on longer life expectancies than the previous tables.
The value of all your IRAs on Dec. 31 of the proceeding year divided by the distribution period from the Uniform Lifetime Table is your required minimum distribution. If your beneficiary is your spouse and he or she is more than 10 years younger you can use the distribution period in the Joint and Last Survivor Table. Both of these tables are found in IRS publication 590 ( www.irs.gov).
Since 2015 is your required beginning distribution date, you must use the account balances as of Dec. 31, 2014, to determine this required minimum distribution even if you decide to postpone this distribution to 2016. If you have multiple IRAs, use the total of all account balances as of Dec. 31, 2014, for your 2015 required minimum distribution.
Even though all IRA account balances are used to determine the prior end-of-year value, you may take your required minimum distribution from one IRA or any combination of your IRAs. Balances of inherited IRAs or Roth IRAs you own are not included in this calculation.
The single Life Expectancy Table must be used for inherited IRAs. Under current tax law, there is no required minimum distribution for Roth IRAs.
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