Understanding Required Minimum Distributions From IRA’s

What are Required Minimum Distributions?

Beginning when they reach the age of 70 ½, IRA owner’s must start taking withdrawals from their account each year. These withdrawals are known as RMDs (Required Minimum Distributions) A choice can be made to delay the first of theses distributions until April 1st following the year the account holder reaches 70 ½. If the choice is made to delay the first RMD, rather than taking it by December 31st of the year in which the account holder reaches 70 ½, then he or she will have to take two distributions in that year. They will be required to take one by April 1st and another one by December 31st. Distributions must then be made by December 31st of each subsequent year. Please remember that by delaying the first distribution, the following year both distributions will be counted as taxable income. Be Cautious: If the account holder fails to take out the RMDs it can result in an IRS penalty of 50% on the amount that should have been distributed.

Changes to the RMD Rules.

In January 2001, the IRS proposed revised rules for the Required Minimum Distributions. These rules, finalized in April 2002, eliminated the need to make elections for life expectancy or calculation methods, as under the old rules. In addition, you no longer have to name a beneficiary before you begin taking your Required Minimum Distribution from the account. Why is this important? Once an individual selected a method, it could not be changed. Many times it resulted in an IRA being completely liquidated after the owner’s death, leaving a huge tax bill for the beneficiaries.

Benefits to the new RMD rules

Under the 2002 rules, you can designate a beneficiary or change a designation after you reach the age 70 ½ without affecting your RMD calculation. Virtually, in all cases, the amount of money you must withdraw when you start taking distributions has declined as a result of the new RMD rules. Smaller distributions will mean that your tax bill will potentially be lower because taxes only apply to money when it’s withdrawn from your account. As a result, a larger portion of your assets can continue to grow tax-deferred to help build wealth, which can result in more of your IRA assets going to your beneficiaries.

To find out more about the Required Minimum Distributions changes or to get an RMD calculation. Contact Us!