Distributions from Traditional IRAs Between Ages 59 1/2 and 70 1/2

Greetings! I trust that this finds you well and enjoying life.

Let’s examine rules and considerations involved in distributions from IRAs. Once you reach the age of 59 ½, you are allowed (but not required) to take distributions from your traditional IRA without being subject to the 10 percent premature distribution tax. You may choose to take distributions sporadically, as you need the money, or you may request an automatic distribution from your account according to a prearranged schedule you establish with your IRA administrator.

Should you withdraw money from your IRA between ages 59 ½ and 70 ½? It depends on your circumstances. If you really need the money for income or unforeseen expenses, you might consider drawing on your IRA. However, if you have other sources of income and don’t need the IRA funds, you may want to think twice about withdrawing funds. Even though you will be free of the premature distribution tax once you’ve reached age 59 ½, you may still have to pay income taxes on all or part of any IRA withdrawals (depending on whether or not the contributions you made were tax deductible). If the amount of a taxable distribution is substantial, it may even push you into a higher tax bracket for that year. This could increase your annual tax liability significantly.

In addition, if you take a number of large IRA distributions after reaching 59 ½, your IRA could be depleted (or at least reduced in size) more quickly than you had planned. This could mean a smaller nest egg for your later retirement years when you may need income the most and a much smaller balance available to leave to your beneficiaries when you die. And of course, the longer you leave funds in an IRA, the greater the opportunity for compounded, tax-deferred growth of earnings. The point is that it’s generally not wise or appropriate to take distributions from an IRA between ages 59 ½ and 70 ½.

Ideally you would like to have complete control over the timing of distributions from you traditional IRAs. Then you could leave your funds in your IRAs for as long as you wished and withdraw the funds only if you really needed them. This would enable you to maximize the funds’ tax-deferred growth in the IRA and minimize your annual income tax liability. Unfortunately, it doesn’t work this way. You must take what are known as required minimum distributions from your traditional IRAs.

Required minimum distributions (RMDs), sometimes referred to as minimum required distributions (MRDs), are withdrawals that the federal government requires you to take annually from your traditional IRAs after you reach age 70 ½. You can always withdraw more than the required minimum in any year if you wish, but if you withdraw less than required, you will be subject to a federal penalty tax. RMDs are calculated to dispose of your entire interest in the IRA over a specified period of time. The purpose of this federal rule is to ensure that people use their IRAs to fund their retirement and not simply as a vehicle of wealth transfer and accumulation.

When must RMDs be taken? Your first RMD represents your distribution for the year in which you reach age 70 ½. However, you have some flexibility in terms of when you actually have to take this first year distribution. You can take it during the year you reach age 70 ½, or you can delay it until April 1 of the following year. Since your first distribution generally must be taken no later than April 1 following the year you reach
70 ½, this date is known as your required beginning date (RBD). Required distributions for subsequent years must be taken no later than December 31 of each calendar year until you die or your balance is reduced to zero. This means that if you opt to delay your first distribution until the following year, you will be required to take two distributions during that year, your first year required distribution and your second year required distribution.

Example(s): You own a traditional IRA. Your 70th birthday is December 2 of year one, so you will reach age 70 ½ in year two. You can take your first RMD during year two, or you can delay it until April 1 of year three. If you choose to delay your first distribution until year three, you will have to take two required distributions during year three, one for year two and one for year three. That is because your required distribution for year three cannot be delayed until the following year.

Your first decision is when to take your first RMD. Remember, you have the option of delaying your first distribution until April 1 following the calendar year in which you reach age 70 ½. You might delay taking your first distribution if you expect to be in a lower income bracket in the following year, perhaps because you’ll no longer be working or will have less income from other sources. However, if you wait until the following year to take your first distribution, your second distribution must be made on or by December 31 of that same year.

Receiving your first and second RMDs in the same year may not be in your best interest. Since this “double” distribution will increase your taxable income for the year, it may cause you to pay more in federal and state income taxes. It could even push you into a higher federal income tax bracket for the year. In addition, the increased income may cause you to lose the benefit of certain tax exemptions and deductions that might otherwise be available to you. So the decision of whether or not to delay your first required distribution can be crucial and should be based on your personal tax situation.

RMDs are calculated by dividing your traditional IRA account balance each year by the applicable distribution period. Your account balance is calculated December 31 of the year proceeding the calendar year for which the distribution is required to be made. The applicable distribution period is generally the life expectancy factor for your age set out in the Uniform Lifetime Table published by the IRS. (If your beneficiary is your spouse, and he or she is more than 10 years younger than you, the applicable distribution period is determined using a joint and last survivor table published by the IRS.)

Caution: When calculating the RMD amount for your second distribution year, you base the calculation on your account balance in the IRA as of December 31 of the first distribution year (the year you reached age 70 ½), regardless of whether or not you waited until April 1 of the following year to take your first required distribution.

If you have more than one traditional IRA, a required distribution is calculated separately for each IRA. These amounts are then added together to determine your RMD for the year. You can withdraw your RMD from any one or more of your IRAs. (Your traditional IRA trustee or custodian must tell you how much you’re required to take out each year, or offer to calculate it for you.)

If you fail to take at least your RMD amount for any year (or if you take it too late), you will be subject to a federal penalty tax. The penalty tax is a 50 percent excise tax on the amount by which the RMD exceeds distributions actually made to you during the taxable year. You report and pay the 50 percent tax on your federal income tax return for the calendar year in which the distribution shortfall occurs.

If we can help in any way with this or anything else related to retirement don’t hesitate to contact us.

Best regards.

Jeff Christian CFP, CRPC

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