How Much Do I Have to Withdraw from My Traditional IRA?

The minimum distribution rules, for U.S. income tax purposes, depend on the type of Individual Retirement Account (IRA). The owner of a traditional IRA must begin receiving distributions upon reaching age 70 �½. There are no required minimum distributions for an owner of a Roth IRA, but when the owner dies, certain minimum distribution rules that apply to traditional IRAs also apply to Roth IRAs.

Traditional IRAs

If you have a traditional IRA, you cannot keep your funds in the account indefinitely. The purpose of these accounts is to provide for retirement; therefore minimum required distributions are established according to the U.S. income tax law. And there is a penalty if these minimum required distributions are not taken. This penalty takes the form of a 50% excise tax on the amount that is not distributed as required.

Required Beginning Date

For a traditional IRA, you must begin receiving distributions by April 1st of the year following the year you reach age 70 �½. This is referred to as the required beginning date. But the amount that must be distributed by April 1st corresponds to the calendar year in which you reach age 70 �½. If you did not take a minimum required distribution during that year, you have until April 1st of the following year to take it. You must then take the required minimum distribution for each year by December 31st. So, if you did not receive a distribution during the year you reached age 70 �½, you will have to take two distributions the following year: the first, by April 1st, corresponding to the prior year; and the second, by December 31st, corresponding to the current year.

Even if you started receiving distributions from your IRA before you reached age 70 �½, you will still need to calculate and receive the required minimum distribution according to the tax rules, once you reach that age. If you take out more than the minimum required amount in one year, you cannot apply the excess against the minimum required distribution for a future year. At least the required minimum amount must be taken out each year.

Figuring the Required Minimum Distribution

You or your IRA trustee must figure your required minimum distribution each year. This is calculated as the balance in your IRA as of the close of business on December 31st of the preceding year, divided by the applicable distribution period or life expectancy. The distribution period is the maximum number of years over which you are allowed to take distributions from your IRA.

If you have more than one IRA, you will need to separately calculate the required minimum distribution for each IRA. Once you have figured your total required distributions from all your IRAs, you can withdraw this total amount from one of your IRAs, or you can take distributions from more than one, or from all your IRAs, provided the total amount you withdraw is at least as much as the total required minimum distributions calculated for all your IRAs.

IRA Balance

Your IRA balance is affected by contributions you make, distributions you take out, rollovers and recharacterizations, and earnings on the account. The timing of these transactions will affect your IRA balance as of December 31st of each year, and therefore the required minimum distribution calculation.

Contributions

Contributions increase your account balance in the year they are actually paid. If you make a contribution for last year by April 15th of this year, your IRA balance will be increased this year. Contributions made after December 31st of last year will therefore not be taken into account in calculating your required minimum distribution for this year.

Rollovers and Recharacterizations

Rollovers are tax-free distributions of cash or other assets that you receive from one retirement plan and contribute to another retirement plan – a traditional IRA in this case. Rollovers can be made to a traditional IRA from another traditional IRA, a qualified retirement plan maintained by an employer for its employees, a deferred compensation plan of a state or local government (section 457 plan), or from a tax-sheltered annuity plan (section 403 plan). Rollovers are generally not includible in your taxable income until distributions are taken from the second plan.

Recharacterizing means treating a contribution to one type of IRA as if it had been contributed to a different type of IRA. In order to recharacterize a contribution you must generally do so through a trustee-to-trust transfer, from the first IRA to the second. Any net income allocable to the contribution must be included in the transfer. You must report the recharacterization on your tax return for the year in which the contribution was made, and the contribution must be treated as having been made to the second IRA on the date it was actually contributed to the first IRA.

If you have any outstanding rollovers or recharacterizations of Roth IRA conversions that are not in any account at the end of the year, the balance in your traditional IRA as of December 31st must be adjusted, for purposes of calculating your required minimum distribution. The balance in the receiving IRA is increased for a rollover from a qualified retirement plan or from another IRA. The balance would also be increased for a recharacterization of a Roth IRA conversion, including the allocable net income.

Distributions

Distributions reduce your IRA balance in the year they are made. A distribution after December 31st, taken for last year, will reduce your account balance this year, not for last year. So any distributions taken after December 31st would not reduce your IRA balance as of December 31st of last year for purposes of calculating your required minimum distribution this year.

Worksheet for Determining Required Minimum Distributions

In Appendix A of Internal Revenue Service (IRS) Publication 590, Individual Retirement Arrangements (IRAs), there is a worksheet entitled “Worksheet for Determining Required Minimum Distribution”. Publication 590 is available for viewing or downloading from the IRS website at www.irs.gov. This worksheet does not need to be filed with your tax return, but should be kept for your records. You can find your distribution period in Table III, “Uniform Lifetime Table” in Appendix C of the same publication 590. Table III is for unmarried IRA owners, married owners whose spouses are not more than 10 years younger, and married owners whose spouses are not the sole beneficiaries of their IRAs. You would find your age in the table and take the corresponding distribution period to insert on line 4 of the worksheet.

If you are an IRA owner whose spouse is more than 10 years younger and is the sole beneficiary of your IRA, you would use Life Expectancy Table II in Appendix C to find the appropriate period to include on line 4 of the worksheet. You would need to find the point at which your age intersects with your spouse’s age. Both of your ages are as of your birthday in the current year; the year for which you are figuring your required minimum distribution.

Change in Marital Status

For purposes of determining your required minimum distribution, your marital status is determined as of January 1st of each year. If your spouse is your sole beneficiary and dies before you, your spouse will continue to be your sole beneficiary for the year, even if you subsequently name another beneficiary for the remainder of the year. But if you get divorced and change the beneficiary designation on your IRA during the same year, your spouse as of January 1st will not be your sole beneficiary for the year.

For purposes of determining your distribution period (from Table III), a change in beneficiary is effective the year after the date of divorce or death of a spouse.

IRA Distributions to the Owner in the Year of the Owner’s Death

The required minimum distribution for the year of the owner’s death depends on whether the owner dies on or before the required beginning date.

When the IRA Owner Dies On or After the Required Beginning Date

If the owner dies on or after the required beginning date, the required minimum distribution for the owner would be determined as indicated above; that is by dividing the IRA balance as of December 31st of the preceding year by the distribution period from Table III, Uniform Lifetime Table. This would apply unless the owner’s spouse is the sole beneficiary and the spouse is more than 10 years younger than the owner. In this case, Table II, Joint Life and Last Survivor Expectancy, would be used. If the owner dies on or after the required beginning date, the required minimum distribution is not prorated. It is figured as if the owner had lived for the entire year.

When the IRA Owner Dies Before the Required Beginning Date

If the owner dies before the required beginning date, there would be no minimum required distribution for the owner, and the rules for determining the required minimum distributions that the beneficiaries must take would apply. These rules depend on whether the beneficiary is an individual or an entity such as the owner’s estate. And there are special rules if the surviving spouse is the sole beneficiary.

IRA Beneficiaries

Surviving Spouse

If you are the surviving spouse of an IRA owner, and you are the sole beneficiary, you can elect to be treated as the owner of the IRA rather than as the beneficiary. If you make this election, you would calculate your required minimum distribution as if you were the owner, starting the year your spouse died. But, in the year of your spouse’s death, you would not have to use your own age to calculate the required minimum distribution – you can use your deceased spouse’s age.

If your spouse died before reaching age 70 �½, and you do not elect to be treated as the IRA owner, you do not have to start receiving distributions until the year in which your deceased spouse would have reached age 70 �½.

If the surviving spouse dies before being required to start receiving distributions, that surviving spouse would be treated as the IRA owner for purposes of determining the distribution period for succeeding beneficiaries.

Other Beneficiaries Who Are Individuals

As a beneficiary of a deceased owner’s IRA, your required minimum distribution depends on whether the owner died before the required beginning date, or on or after that date.

If the IRA owner dies on or after the required beginning date, the required minimum distribution for the owner would be determined as indicated above, using either Table III or Table II, as applicable. For years after the IRA owner’s death, if you, as an individual, are the designated beneficiary, you would generally determine your required minimum distributions based on the longer of your single life expectancy from Table I for Single Life Expectancy in Appendix C of IRS Publication 590, or the deceased IRA owner’s life expectancy, from Table III or Table II, as applicable.

If the IRA owner dies before the required beginning date, your required minimum distribution as the beneficiary for years after the owner’s death would generally be based on your single life expectancy from Table I.

Date for Determining Who Is A Designated Beneficiary

There is a special timing rule for determining who is a designated beneficiary. The date on which designated beneficiaries are determined is September 30th of the calendar year following the calendar year of the IRA owner’s death. In order to be a designated beneficiary, you must have been a beneficiary of the IRA at the time of the owner’s death and also on September 30th of the following year. This rule exists in order to take into account situations in which the beneficiary may have disclaimed entitlement to the IRA or may have received the entire benefit prior to September 30th. If a person who was a beneficiary at the time of the owner’s death dies before September 30th of the following year, without disclaiming entitlement to the IRA, that person, rather than his or her successor beneficiary, continues to be treated as the beneficiary for purposes of determining the distribution period.

Figuring Required Minimum Distributions for Beneficiaries

Determining the designated beneficiary is important because this will determine the distribution period, or life expectancy to be used for calculating the required minimum distributions that beneficiaries must receive after the IRA owner’s death. If the designated beneficiary is an individual, the required minimum distribution is calculated as the IRA balance as of December 31st of the preceding year, divided by the appropriate life expectancy from Table I, Single Life Expectancy, as follows:

Ã?· If the surviving spouse is the sole beneficiary, his or her age would be used to find the life expectancy number from Table I. But, as mentioned above, in the year of the IRA owner’s death, the surviving spouse can use the deceased IRA owner’s distribution period. And, if the IRA owner had not reached age 70 Ã?½, the surviving spouse does not have to receive required minimum distributions until the deceased spouse would have reached age 70 Ã?½.
Ã?· If the designated beneficiary is an individual other than the surviving spouse, the designated beneficiary’s age would be used to determine the life expectancy number from Table I.

A beneficiary who is an individual can elect to withdraw the entire IRA balance by the end of the fifth year following the year of the IRA owner’s death. In this case it would not be necessary to take a required minimum distribution before that time.

When The Beneficiary Is Not An Individual

If the beneficiary of the IRA is not an individual, such as when the IRA goes to the deceased owner’s estate, the required minimum distribution to the beneficiary (the estate) depends on whether the owner died before the required beginning date, or on or after that date.

Ã?· If the IRA owner died on or after the required beginning date, the required minimum distribution is calculated by taking the IRA balance at the end of the preceding year, divided by the deceased owner’s life expectancy (from Table I – Single Life Expectancy) as of his or her birthday in the year of death. This number would then be reduced by one in each of the succeeding years.
Ã?· If the IRA owner died before the required beginning date, the entire balance in the IRA must be distributed by the end of the fifth year following the year of the owner’s death, and there is no required distribution before that time.

When There Is More Than One Beneficiary

If there is more than one beneficiary on September 30th of the year following the year of the IRA owner’s death (the date for determining who is the designated beneficiary), the beneficiary with the shortest life expectancy will be the designated beneficiary for purposes of determining the required minimum distribution, provided that:

�· All the beneficiaries are individuals, and
�· The account has not been divided into separate accounts for each person.

The general rule is that required minimum distributions are determined separately for each account. But the distribution period for an account is determined separately, disregarding the distribution periods of the other beneficiaries’ accounts, only if the account was set up by the end of the year following the year of the owner’s death.

Summary Points

�· The owner of a traditional IRA must begin receiving required minimum distributions upon reaching age 70 �½.
�· The required beginning date for receiving distributions is April 1st of the year after the year in which the owner reaches age 70 �½.
�· Excess distributions from one year cannot be applied as credits against required minimum distributions in future years.
�· There is a 50% excise tax on amounts that are not distributed as required.
�· The amount of the required minimum distribution is the IRA balance as of December 31st of the preceding year, divided by the distribution period or life expectancy, according to the appropriate table from Appendix C in IRS Publication 590, Individual Retirement Arrangements (IRAs).
�· If you have more than one IRA, you must calculate the required minimum distribution for each one, but you can take the total amount of the required distribution out of one IRA or out of more than one.
�· The IRA balance at the end of the year includes contributions actually made during the year (not made after December 31st and before April 1st of the following year). The balance also includes rollovers and recharacterizations that are outstanding at the end of the year. The IRA balance is reduced by distributions actually taken out during the year.
�· Table III (Uniform Lifetime) is used by an IRA owner whose spouse is not the sole beneficiary and who is not more than 10 years younger than the owner.
�· Table II (Joint Life and Last Survivor Expectancy) is used by an IRA owner whose spouse is the sole beneficiary and is more than 10 years younger.
Ã?· Table I (Single Life Expectancy) is for use by beneficiaries, after the IRA owner’s death. This table is used when the beneficiary is an individual and is the designated beneficiary, but is not both the sole designated beneficiary and the surviving spouse.
Ã?· Required distributions in the year of the IRA owner’s death depend on whether the owner died before or after the required beginning date.
�· If the IRA owner died before reaching age 70 �½, the surviving spouse does not have to take out required minimum distributions until the year the deceased spouse would have reached age 70 �½.
Ã?· In years after the IRA owner’s death, beneficiaries would generally determine their required minimum distribution by using Table I (Single Life Expectancy).
Ã?· Beneficiaries may choose to take out the entire IRA balance by the end of the fifth year following the year of the IRA owner’s death. In this case, it would not be necessary to take out required minimum distributions until that time.

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