IRA owners must take at least a minimum amount from their IRA each year, starting with the year they reach age 70½. This amount is referred to as the required minimum distribution, or RMD.

If a taxpayer fails to take a distribution in the year they reach 70½, they can avoid a penalty by taking that distribution no later than April 1st of the following year. However, that means the IRA owner must take two distributions in the following year, one for the year in which they reached age 70½ and one for the current year.

If an IRA owner dies after reaching age 70½, but before April 1st of the next year, no minimum distribution is required because death occurred before the required beginning date.

DETERMINING THE DISTRIBUTION

For each Traditional IRA, the  minimum distribution (RMD) amount in a particular year is the total value of  that IRA account divided by the number of years the IRA owner is expected to live. The RMDs of all accounts are then combined to determine the total RMD for the year.

• Determining Total Value: The total value is based on the value of the owner’s account at the end of the last business day (usually December 31st) of the prior year. Generally, IRA account trustees will provide this information on the year-end statements or on IRS Form 5498.
  
  
• Determining the Distribution Period: The IRS provides two tables for use in determining the IRA owner’s life expectancy (referred to as “distribution period” by the IRS). Generally, IRA owners will use the “Uniform Lifetime Table” to determine their “distribution period.” If the IRA owner’s spouse is the sole beneficiary (on all the IRA accounts), the Joint and Last Survivor Table may be used. However, the Uniform Lifetime Table will always produce the smallest minimum distribution, unless the spouse is more than 10 years younger than the IRA account owner. Example: The IRA owner is 75 and from the “Uniform Lifetime Table,” the owner’s life expectancy is 22.9 years.
  
  
• Determining Age: Use the owner’s oldest attained age for the year of the distribution. Example: Suppose an IRA owner takes a distribution in February, when the owner’s age of 74, but later in November, turns 75. For purposes of determining the owner’s life expectancy, the oldest attained age for the year, 75, would be used in computing the minimum distribution. The same rule is used for the spouse beneficiary, if applicable.

Example: The IRA account owner is age 75 and the owner’s spouse, who is the sole beneficiary of the accounts, is age 72. Since the spouse is less than 10 years younger than the IRA account owner, the Uniform Lifetime Table will produce the smallest required distribution. From the table, we determine the owner’s life expectancy to be 22.9. The owner has a Traditional IRA account with a value of $87,000 at the end of the prior year. The required minimum distribution is  $3,799 ($87,000 / 22.9).

UNIFORM LIFETIME TABLE – The following table is the one that is generally used to determine the Required Minimum Distribution from Traditional IRA accounts. Not illustrated, because of the size, are the Joint and Survivor Life Table used to determine RMDs when the sole beneficiary spouse is more than 10 years younger than the IRA owner and the Single Life Table used for certain beneficiary RMD determinations. For table values not illustrated, please call this office.

UNIFORM LIFETIME TABLE

TIMING OF THE DISTRIBUTION

The minimum distribution computation determines the amount that must be withdrawn during the calendar year. The distributions can be taken all at once, sporadically or in a series of installments (monthly, quarterly, etc.), as long as the total distributions for the year are at least the minimum required amount.

Amounts that must be distributed (required distributions) during a particular year are not eligible for rollover treatment.

MULTIPLE IRA ACCOUNTS 

For purposes of determining the minimum distribution, the RMD must be figured separately for each Traditional IRA account owned by an individual, but the total RMD for the year can be taken from any one or a combination of the owner’s accounts. If the owner chooses not to take the minimum distribution from each account, it is not uncommon for IRA trustees to require written certification that the owner took the minimum distribution from other accounts.

SPECIAL TAX-FREE IRA TO CHARITY CONTRIBUTIONS 

• No Charitable Contribution – Amounts excluded as a qualified charitable distribution, up to the $100,000 limit, cannot be used as charitable contributions when itemizing deductions on Schedule A.
  
  
• Required Minimum Distribution (RMD) – The amount of a qualified charitable distribution is treated as being part of the taxpayer’s RMD for the tax year.
  
  
• Regular IRAs (Traditional or Roth) Only - The exclusion does not apply to distributions made from “ongoing” simplified employee pensions (SEPs), or “ongoing” SIMPLE IRAs.  The term “ongoing” means the taxpayer is still making contributions.  However, the exclusion would apply to SEPs and SIMPLEs where the taxpayer is retired and will not contribute to the account during the year.
  
  
• Caution - Direct Transfer Requirement – A qualified charitable distribution must be made directly by the IRA trustee to a charitable organization. Thus, a distribution made to an individual, and then rolled over to a charitable organization, would not be excludible from gross income. The result would be a separate IRA distribution and charitable contribution, both subject to the normal rules. A check from the IRA made payable to an eligible charitable organization that is delivered to the organization by the IRA owner will be considered to be made directly by the IRA trustee to the organization. 

MAXIMUM DISTRIBUTION

There is no maximum limit on distributions from a Traditional IRA and as much can be withdrawn as the owner wishes. However, if more than the required distribution is taken in a particular year, the excess cannot be applied toward the minimum required amounts for future years.

UNDERDISTRIBUTION PENALTY

Distributions that are less than the required minimum distribution for the year are subject to a 50% excise tax (excess accumulation penalty) for that year on the amount not distributed as required.

Example: The owner’s required minimum distribution for the calendar year was $10,000, but the owner only withdrew $4,000. The excess accumulation penalty is $3,000, computed as follows: 50% of ($10,000 - $4,000).

If the failure to withdraw the minimum amount or part of the minimum amount was due to reasonable error, and the owner has taken, or is taking, steps to remedy the insufficient distribution, the owner can request that the penalty be excused.

NOT REQUIRED TO FILE

Even though the IRA owner is not required to file a tax return, they are still subject to the minimum required distribution rules and could be liable for the under-distribution penalty even if no income tax would have been due on the under-distribution.

DEATH OF THE IRA OWNER

If the IRA owner dies on or after the required distribution beginning date, a distribution must be made in the year of death, as if the IRA owner had lived the entire year. If the distribution is after the owner’s death, the minimum amount must be distributed to a beneficiary.

BENEFICIARY DISTRIBUTIONS

When an IRA owner dies after beginning the required distributions and the beneficiary is an individual, the beneficiary must begin taking distributions the year after the IRA owner’s death as follows:

Spouse as Sole Beneficiary: The IRS permits a sole beneficiary spouse far more options than it does other beneficiates. When the spouse is the sole beneficiary the spouse has the following options:

• Convert the IRA to their own account, thereby delaying additional distributions until they reach age 70½.
  
  
• Or, if already age 70 ½, convert the IRA to their own account and begin taking RMD based on their attained age using the Uniform Distribution Table.
  
  
• Treat the IRA as if it were their own, frequently referred to as recharacterizing the IRA to a “Beneficial IRA” and naming new beneficiaries. The spouse must begin taking minimum distributions in the year following the owner’s death based on their life expectancy using the Single Life Table. Distributions from Beneficial IRAs are not subject to the premature distribution penalties. Later, after they are no longer subject to the premature distribution penalty, the IRA can be converted as their own and they can choose to stop taking distributions until age 70 ½.

The choice depends on the surviving spouse’s financial needs and goals and in most cases requires careful planning.

Caution: The sole beneficiary requirement is not met if the beneficiary is a trust, even if the spouse is the sole beneficiary of the trust.

Other Individual Beneficiaries: If the beneficiary or beneficiaries include individuals other than the spouse, then the first required distribution is the calendar year following the year of the IRA owner’s death. Using the Single Life Table, the post-death distribution period used to determine the RMD is the longest of:

1. The remaining life expectancy of the deceased IRA owner using the deceased’s attained age in the year of death and subtracting one for each year subsequent year after the date of death.

2. The remaining life expectancy of the IRA beneficiary using the beneficiaries attained age in the year of death and subtracting one for each year subsequent year after the date of death.

The beneficiaries’ remaining life expectancy is determined using the oldest beneficiary’s age as of their birthday in the calendar year immediately following the IRA owner’s death or for those accounts that were separated by the end of the year after the year after death, the age of each beneficiary. Where the beneficiaries include the spouse, account separation must be completed by September 30th instead of year-end to take advantage of the spouse sole beneficiary provisions.

5-Year Option: A beneficiary, who is an individual, may be able to elect to take the entire account by the end of the fifth year, following the year of the owner’s death. If this election is made, no distribution is required for any year before that fifth year.

The above rules apply only to distributions where the beneficiaries are all individuals and occur after the IRA owner has begun or is required to begin minimum IRA distributions. For distribution options for non-individual beneficiaries or for distribution options where the IRA owner dies prior to beginning the required minimum distributions, please call this office.

PLANNING CAN MINIMIZE THE TAX

Advance planning can, in many cases, minimize or even avoid taxes on Traditional IRA distributions. Often, situations will arise where a taxpayer’s income is abnormally low due to losses, extraordinary deductions, etc., where taking more than the minimum in a year might be beneficial. This is true even for those who may not need to file a tax return but can increase their distributions and still avoid any tax. If you need assistance with your planning needs, please call this office for assistance.