In addition to the restrictions on when a taxpayer can start taking money from retirement accounts, the IRS also has requirements concerning distributions that must be made. In 2002, the IRS simplified the computation of an individual’s required minimum distribution. Use of the regulation became mandatory on January 1, 2003.
In the case of traditional IRAs, distributions must begin no later than April 1st of the year following the year in which the taxpayer turns 70½, regardless of whether or not retired. While the taxpayer must begin taking minimum distributions from their accounts as of the required beginning date, the new rules reduce, often dramatically, the annual required distributions. Subsequent annual distributions must be made before December 31st of each taxable year. Therefore, it is often advisable for the IRA holder to take the initial distribution before December 31st of the year that he or she turns 70½ instead of waiting until April 1st of the following year. Waiting means taking two distributions in the same tax year (the first one before April 1st, the other before December 31st).
The minimum amount that must be distributed from retirement accounts depends on the taxpayer’s life expectancy, or the joint life expectancy of the taxpayer and his or her spouse if the spouse is more than 10 years younger than the taxpayer. If the required amounts are not distributed, a 50% excise tax is imposed on the amount that should have been distributed but was not.
Under the old rules, taxpayers had to choose among several methods of figuring their required minimum distribution. The new rules simplify the calculation greatly. In order to determine the amount of the required minimum distribution for a given year, the taxpayer will now simply locate their age as of December 31st of that year on one uniform table to obtain the updated number of years that the benefits are expected to be paid. That number will then be divided into the account balance as of the end of the previous year to give the amount that must be distributed during the current year. That table is also used by all retirement plan participants to calculate their required distributions. Remember, the only exception is for a participant whose spouse is more than 10 years younger. In this situation, the old joint and last survivor table may be used to stretch out and reduce annual payments even more.
Not only is the new one-step procedure simpler, it is also more liberal. Most participants will find that their payout period is appreciably longer and their required distributions considerably less than what would have been the case under the old rules. Since the required distributions are reduced, more money can stay in the account and continue to grow tax-deferred. The taxpayer’s annual tax liability, of course, shrinks along with the required distributions.
If you would like any further information regarding this issue as well as any other tax related issue, please contact Henssler Financial at 770-429-9166 or [email protected].