Posts tagged "required"

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
Read his ebook: ‘Wise Way to Financial Independence’ =>
http://www.easyretirementknowhow.com/WiseWayGate.htm

Figuring required minimum distributions

Figuring required minimum distributions
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Everyone’s talking about what taxes might look like in 2011 . Quit worrying about future IRS bills! Make some tax moves now that could lower what you’ll owe Uncle Sam on your 2010 income tax return. Here are five easy ones.
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What to do if you forget to take the minimum required distribution from an inherited IRA for 2009?

I heard that this was not required last year but others have said it is required for an inherited IRA. Should I do it now for 2010 and say it’s for 2009? Help!

Required Minimum Distribution 401k Limits

When it comes to retirement planning, saving for retirement is more important than ever, this day and age. Inflation and the uncertainty of Social Security income point towards the seriousness of our economic situation. The only way we can have a certain comfortable retirement is to take these matters into our own hands, rather than relying on what worked for others in the past. One of the most obvious ways to do this is to invest in a retirement plan, like an individual retirement account, IRA, or 401k retirement plan. After contributing to these plans over the years there will come a time when we are required to make withdrawals, this is called Required Minimum Distribution, or RMD.
Once reaching a particular age (currently age 70 ½) Required Minimum Distribution is mandatory according to the Internal Revenue Service (IRS). These mandatory withdrawals are required each year and every year, allowing the IRS to collect taxes from the distributions of retirement accounts. These are made mandatory by the government, because contributions either to a 401k or an IRA were made with before tax dollars. Initially, you’re encouraged to save for retirement with an IRA or 401k deduction with the assumption that taxes are deferred until Required Minimum Distribution. This may not sound like the best deal in the world, but the benefits from tax-deferred growth are substantial over time. The only real way to avoid Required Minimum Distribution would be to set up an initial investment and Roth 401k or Roth IRA.
Now, when you begin your initial investment in either an Individual Retirement Account or a 401k, you can’t just submit a substantial amount of money and defer it from tax. If this were the case, it would be too easy to put large amounts of money away and avoid having to pay taxes. So, the government puts limits on the amount of money we can put away in our retirement plans. 401k limits and IRA limits increase with each and every year, as the cost of living rises. If you’re fortunate enough to have a 401(k) available to you at your workplace, you should definitely take advantage of it. Not only will you likely receive a match from your employer, but 401k limits are often substantially larger their IRA counterparts. Currently (for 2008), IRA contribution limits are a maximum of $6,000 inclusive of the 50 and older catch-up provision. Where as, current 401k limits are set at $20,500, inclusive of the 50 and older catch-up. If you are below 50 for either, the amount is $5,000 for the IRA account and $15,500 for the 401k retirement plan. This may not sound fair to those that don’t have access to a 401k retirement plan, but it should provide more urgency for those whom are left out.
401k or IRA withdrawals are not just taken via required minimum distribution, however. You can take a qualified plan withdrawals at age 59 1/2, and the funds will be taxed at that time. Qualified accounts taken before 59 1/2 will be subject to early penalty in taxes. As far as the required minimum distribution amount, at age 70 1/2 this currently works out to be about 3.65%, based on life expectancy tables. As you age, this percentage increases, so at age 90 for example, the percentage is currently 8.77%. For obvious reasons, the government wants to get the taxes out of you before you die. Make sure to work with a qualified financial planner. When determining your specific required minimum distribution or 401k is limit, as these both involve very important tax and retirement planning issues.

If you would like more information on how Required Minimum Distribution works you can visit the site for more details. You can also find more on specific 401k Limits and how they might affect your unique situation.

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