Turning age 70.5 with an IRA account – what you need to know

Roxanne Alexander, CAIA, CFP®, AIF®, ADPA®
Senior Financial Advisor

When you turn 70.5, you have to start taking distributions from your retirement plans. There are several decisions you will need to make once this process starts, but making sure you do start taking distributions is the most important, since the IRS imposes a 50% penalty on funds that are not withdrawn as mandated.

How is a required distribution calculated?

The calculation is fairly straightforward, if you fall under the regular rules. You would take the value of your IRA accounts as of December 31 of the prior year and then divide it by the IRS divisor based on your age. This IRS Uniform Lifetime Table can be found here:

https://www.fidelity.com/building-savings/learn-about-iras/required-minimum-distributions/overview

There are several rules depending on whether you are married or single, and whether your spouse is 10 years younger than you are. If your spouse is 10 years younger, your distribution amount will be less, and you would use the IRS Joint Life Expectancy Table to find the correct divisor. The custodian of your IRA will usually calculate your required distribution and will track how much you take out on a monthly basis. They will then give you this information on your monthly statement. However, if you have a unique situation (inherited IRA or younger spouse), you may need to calculate and track this on your own.

Do you need the cash?

If you need cash, you would simply withdraw the required amount from your IRA and move it into a taxable account less any tax withholding. Usually the custodian of the funds will send the tax withholding directly to the IRS on your behalf. This works somewhat like withholding on a W2, so when you go to file your taxes this amount has already been paid to the IRS on your behalf. At the end of the year, you will get a 1099R showing how much you took out and the taxes that were withheld on this amount. Sometimes your accountant may suggest a higher withholding than your actual tax rate, since the withholding may cover taxes on any other income you might be receiving. If you don’t need the funds, you can transfer securities into a taxable account. This will still be considered a taxable distribution, so you will either need to have funds available to pay the taxes or you may need to sell some securities to generate funds to pay the taxes. You should speak to your accountant to determine how much you should withhold based on your tax situation.

Should I wait until the following year to take my distribution?

You have until April 15th of the year after you turn 70.5 to take your first distribution. Keep in mind that, in this case, you will have to take a second distribution that year. If you are still working in the year you turn 70.5, but plan to retire the following year and project that you will have lower income, you can choose to wait and take two distributions the following year.

Do I have to take a portion from each account?

If you happen to have several IRA accounts, you can aggregate the value of the accounts to make the calculation, but then take the distribution from only one of the accounts. You do not need to take a portion from each account, unless you prefer to do it that way for accounting purposes. Keep in mind, if you have a 401K account, you will need to calculate that amount separately and then take that portion from the 401K. If you have other accounts, such as retirement annuities or 403b’s, you will likely have to take those distributions separately, as they cannot be aggregated with your regular IRAs. If you have a 401k and you are still working and contributing, providing you are not more than a 5% owner of the company, you can choose to defer distributions until you retire. If you own more than a 5% share of the company, you will be required to take a distribution.

Charitable contributions and the new tax laws

The new tax laws have increased the standard deduction and put caps on what you can itemize. If you have charitable contributions, you can make these through your IRA by sending a check to the charity directly from your IRA account. These donations go towards satisfying your required minimum distribution, but are tax free. For example, if your RMD is $50,000 and you donate $50,000 to a charity from your IRA, you owe no taxes and you have satisfied your required distribution. You can also request checks on your IRA in order to make smaller donations along the way that otherwise may not be deductible. Keep in mind that the charity has to be registered as a qualified charity.

Feel free to contact Roxanne Alexander with any questions by phone 305.448.8882 ext. 236 or email: RAlexander@Evensky.com 

For more information on financial planning visit our website at www.Evensky.com

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