Q: When I retired, I rolled the balance of my pension plan over into my own self-directed IRA. I am now age 69 and will soon be 70. Could you provide an explanation of the rules governing required distributions?
A: As you approach your 70th birthday, you should be aware that you must begin taking minimum annual distributions from your traditional IRAs no later than April 1 following the year in which you reach age 70-1/2. The tax rules require minimum annual distributions to be made to help assure that IRAs are used primarily to provide for retirement, rather than as a family tax shelter.
Required Minimum Distributions
IRS regulations favor the IRA owner who wants to make the smallest possible withdrawal each year. Applying the rules that are used by most IRA owners, if you reach age 70-1/2 during 2012 and your 71st birthday falls within 2012, then:
- your withdrawal for 2012 must be at least 3.77% of your IRA balance at the end of 2011;
- your withdrawal for 2013 must be at least 3.9% of your IRA balance at the end of 2012; and
- your withdrawal for 2014 must be at least 4.05% of your IRA balance at the end of 2013.
The minimum distribution is calculated separately for each IRA, but the total minimum distribution for all of them may be paid out from one IRA or from a combination of IRAs.
Required Beginning Date
If you reach age 70-1/2 in 2012, you actually have until April 1, 2013 to take your first year's distribution. However, if you wait until 2013 to take this distribution, you may wind up loading too much income into 2013, since you will also take your second year's annual minimum distribution in 2013.
Waiting until your second year to take your first year’s distribution could have unpleasant tax consequences. You may be pushed into a higher tax bracket in 2013, be hit with a larger tax on social security benefits in 2013 and saddled with larger cutbacks for deductions (such as for medical expenses) that have an adjusted-gross-income-based “floor.” As much as you may want to defer income to a later year, these negative tax consequences deserve consideration.
Consult a CPA
The decision whether to accelerate or defer minimum distribution payouts is not an easy one. Your local CPA can help you make the best choice. He or she can provide a knowledgeable, objective perspective, taking into account your overall financial and tax situation and help you determine whether you'd be better off beginning required distributions this year, instead of next.
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Solutions
- Required Minimum Distributions
- Required Beginning Date
- Consult a CPA
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