How to Calculate Your Minimum Required Distribution If You Own an IRA
An IRA owner is the person who started and contributed to his IRA. As an owner, you must take a minimum required distribution (MRD) from your traditional IRA or non-deductible each year after reaching 70 1/2. This article explains the MRD rules for IRA owners only – not for beneficiary owners who have slightly different rules.
MRD rules also apply to owners of simplified employee pension (SEP) accounts as well as SIMPLE IRAs, since they’re both considered IRAs for this purpose.
Since you contributed to your IRA with tax-deductible contributions from working income, none of the money in your IRA has been taxed. But the government expects you to at least withdraw some of your money for your retirement. And doing so will allow the government to get some of its tax back from you! So, here are how the rules on MRDs work:
Penalty for taking less than the MRD amount?
You can take more than the MRD each year without a penalty. But the amount you take in excess of the MRD in one year cannot be used to take less than the MRD amount in any other year. But if you take less than the MRD, you are penalized by an amount equal to 50% of that part of your MRD you didn’t take and must also pay income tax on that too.
When must I begin my MRD?
You must begin your MRD withdrawals in the year you turn 701/2. But, you get a slight break for that year – and only that year. If you don’t want to take it by that year’s end (Dec. 31), then you must take it by April 17 of the next year. So, it’s not much of a break!
How often must I take my MRD?
You must take all other MRDs by Dec. 31 of every year following the year you turn 701/2. If you delayed your first MRD to April 17, you still need to take your second MRD by Dec. 31! That’d be two MRDs in the same year. And that will increase your income (and its tax) by two MRDs for that year.
What amount corresponds to my MRD?
The MRD for a specific year is the value of your IRA (or total of all your IRAs if you have more than one) as of Dec. 31 of the previous year, divided by your life expectancy factor (from IRA table) for that specific year. So, each year your MRD will change since the value of your IRA will change and your life expectancy will change. So a new calculation must be done each year.
How do I find the life expectancy factor?
The life expectancy factors are found in Appendix C of IRS publication 590. You’ll use either Appendix C’s table II or table III. In the majority of cases, you’ll use Table III (called Uniform Life Time). You can read off the remaining life expectancy (called your life expectancy factor) associated with your age.
The only circumstance you’ll use Table II (called Joint Life and Survivor Expectancy) is if you’re married AND your wife (spouse) is your sole beneficiary of your IRA AND she (or he) is more than 10 years younger than you.
In this case, Table II gives a slightly higher expectancy factor at each age for you and your spouse – and depending on your spouse’s age – so your MRD will be a little less, and, therefore, last longer. There’s really not a big difference unless your spouse is much more than 10 years younger!
Shane Flait writes and consults on financial, legal, tax, and retirement issues. He gives you workable strategies to accomplish your goals.
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IRAs, Roths, and 401(k)s with Taxed and Untaxed Minimum Required Distributions (MRDs)
IRA and Roth IRAs are two examples of government-regulated retirement savings plans – called qualified plans. Both are generally personal plans you set up at banking-type institutions that you can contribute to and withdraw from yourself. Other examples of qualified plans associated with work are 401(k), 403(b) and their Roth versions- like Roth 401(k).
This article explains which qualified plans have minimum required distributions (MRDs) associated with them and some strategy.
Qualified plans such as 401(k)s, and IRAs were created with specific tax characteristics as an incentive for people to save for their retirement by contributions from their working income.
There are fundamentally two different qualified plan type tax characteristics. I’ll call them
* Deductible Contributions then later taxed, and
* Nondeductible Contributions then never taxed
Taxation and Obligations for the owners (i.e. plan contributors) of the plans
The tax characteristics of the ‘deductible contributions’ type plans are represented by your 401(k) at work or your own IRA. Your yearly contributions to each plan are limited but deductible from your income in the year of contribution. But the income tax of both those contributions and all earnings they create are tax-deferred until you withdraw money from your plan.
Whenever you withdraw from these plans, the withdrawal amount in that year is added to your income to be taxed at your income tax rates. Since qualified plans are geared for retirement, you’re penalized with a tax of 10% on your distribution in addition to whatever income tax is incurred if you’re under 59 1/2.
Lastly, government-regulations obligate you to make at least a minimum required distribution (MRD) each year from your IRAs after you’ve turn 70 1/2.
The tax characteristics of the ‘non-deductible contributions’ type plans are represented by your Roth 401(k) at work, or your own Roth IRA. Your yearly contributions to these plans are limited, but they’re not deductible from your income for taxation. So they’re taxed. But the advantage now is that they and all their earnings and gains will grow each year tax-free – not just tax-deferred.
Additionally, when you withdraw from these Roth-type plans, the money comes out tax-free. But you must wait to withdraw your money until reach 59 1/2 or be penalized as above.
If you’re the owner of a personal Roth IRA, you have no obligation to make any MRDs ever. If you leave your Roth IRA to your spouse, she also has not obligation to make MRDs either.
If you have a Roth 401(k)s, you must make the normal RMDs as those with non-deductible contribution types above, but – like all Roth plans – the money comes out tax free.
What about plan beneficiaries after you die?
All beneficiaries of plans -401(k)s, IRAs, Roth 401(k)s or Roth IRAs – must make MRDs except the spouse beneficiary of a Roth IRA if she chooses to be owner. But remember, RMDs or withdrawals from Roth plans always come out tax free.
How much money must come out in an RMD?
The MRD for a specific year is the value of your IRA (or total of all your IRAs if you have more than one) as of Dec. 31 of the previous year, divided by your life expectancy factor (from IRA table found in Appendix C of IRS publication 590 (online)) for that specific year. So, each year your MRD will change since the value of your IRA will change and your life expectancy will change. A new calculation must be done each year.
You can withdraw more than your MRD, but you’re penalized if you withdraw less. You’re penalty is a tax equal to 50% of that part of your MRD you didn’t withdraw.
Reasons for converting to a Roth IRA Tax free growth and tax free withdrawals forever is hard to pass up. And that’s for owners, spouse beneficiaries and nonspouse beneficiaries.
Only the nonspouse beneficiaries need to make RMDs – but they’re still tax free ones. And those RMDs are based on the beneficiary life expectancy. So if their young, very little has to be taken out.
It makes good sense to convert any Roth 401(k) to your own Roth IRA for the freedom of not having to make RMDs by the owner or his spousal beneficiary. The conversion is tax free.
Conversion from a ‘deductible contributions’ plan to your Roth IRA requires you to pay income tax on amount you choose to convert. For 2010 and beyond there’s not income limit prohibiting you from making the conversion – as there has been.
Holding money in a Roth IRA keeps it safe from future increases in income tax rates that plague holders of ‘deductible contributions’ plans.
Shane Flait gives you workable strategies to accomplish your goals in financial, legal, tax, retirement and protection issues. .
Get his FREE report on Managing Your Retirement =>
http://www.easyretirementknowhow.com/FreeReportandSignUp.htm
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