Required Distribution of an IRA:
Expert Advice From Money Insider Jeff Fleming
People planning for retirement usually focus more on putting money into savings and investments rather than on how to withdraw funds. However, the withdrawal aspect of investing is equally important.
Timely Distributions
John and Mary have an IRA from which they rarely need to make withdrawals. Unfortunately, money-growing tax deferred in most retirement plans cannot be left there indefinitely. Tax laws require the participant to begin to withdraw qualified money by April 1 of the year following the year in which he or she turns age 70 1/2. These withdrawals are called "required minimum distributions." Failure to make the required minimum distribution will result in a 50 percent penalty tax on the difference between what should have been withdrawn and the actual withdrawal amount.
I recommend that John and Mary consider taking distributions from their IRA before drawing upon their other funds. Obviously, this creates an increase in their taxable income because 100 percent all of the IRA distributions are taxable. Nevertheless, John and Mary will eventually pay the income tax on the IRA. Upon their deaths, the IRA will be paid to their beneficiaries who will still owe income taxes on the plan proceeds. Compare this with non-qualified assets owned at death, which receive a stepped-up basis. This allows the estate or beneficiaries receiving the property to liquidate the assets and avoid most, if not all, of the capital gains tax that would be due if the asset were sold during the owner's lifetime.
If you reach age 70 1/2 and find yourself with quite a nest egg in a qualified plan, as often happens, and you want to reduce the required minimum distribution, then you can choose to calculate the distribution based on the joint life expectancy of you and the beneficiary of the plan. The primary beneficiary is usually the participant's spouse. If your beneficiary is substantially younger than you, the minimum distribution may be substantially less than if based on your life expectancy only. Unfortunately, the IRS caught up with this trick and limits the life expectancy that you can use for a beneficiary who is not your spouse to 10 years younger than the participant. If your spouse happens to be a greater number of years younger, there is no such limitation.
Expert Advice for John and Mary
The Need to Plan
Asset Allocation
Required Distribution of an IRA
Preparing for the Home Stretch, from our sponsor, Merrill Lynch
back to Financial Futures intro
|
