I have had several requests from clients and others about when they need to take the Required Minimum Distribution (RMD) from their traditional Individual Retirement Account (IRA).
Similar rules apply for individuals whose retirement accounts were established under Sec. 401k or other retirement accounts where no income taxes were paid on the monies transferred into these types of retirement accounts, and the taxpayer took a deduction on his or her Form 1040.
There are no distribution requirements for ROTH IRAs or similar accounts since the contributions came from post-tax dollars; that is, the taxes were paid on the income before it was put into a Roth-type IRA account.
RMDs occur when the taxpayer turns 70 1/2. The first distribution might be delayed to the year after the taxpayer turns 70 1/2.
If the taxpayer turns 70 1/2 in the same year he or she turned 70, no distribution is required until April 15 of the following year.
However, a second distribution will be required for that year (you turn 71), and this distribution must be taken by Dec. 31.
If the taxpayer turns 70 1/2 the following year (between Jan. 1 and June 30), the first required distribution would be April 15 of the next year; again, a second distribution will be required that year since you will be 71.
I recommend that normal distributions be taken by Dec. 1. This allows time to remind the trustee that a distribution has to be taken and to ensure its timely arrival.
Late distributions are met with penalties from IRS, and they are not fun.
I know of only one case where the taxpayer was able to convince the IRS not to apply a penalty for a late distribution. It took her six months of work, getting proof and documentation together showing that she had contacted her trustee early enough to process the paperwork, and that the trustee failed to pay her on time. IRS waived the penalty.
The amount of distribution is based on the total value of the IRA account or accounts on Dec. 31 of the year proceeding.
Distribution can be taken from only one account where an individual has more than one account as long as the distributed amount covers the required minimum distribution of all accounts.
What you do with the money is up to you. Spend it, invest it, give it to charity, go on vacation, give it to the children – it is up to you.
If it is given to charity, it might be deductible for the year of contribution.
Please do not ignore an RMD. It can be very costly.
Virginia Moryadas is a tax preparation professional in Bluffton.