The initial mandatory IRA withdrawal can be a confusing topic. The rules involving when the first mandatory withdrawal must occur and how much must be withdrawn are relatively simple. However, many investors are unsure when to time their first withdrawal that would be most appropriate for their financial situation.
What assets must be included when calculating a mandatory withdrawal?
Minimum distributions are calculated by applying a divisor (discussed below) to an individual’s total combined assets in the following account(s): qualified retirement plans, 403(b) Plans, IRAs, SEPs, SIMPLE IRAs and section 457 Plans. This article will assume that all plans are rolled into an IRA after retirement. The total of these combined accounts will be referred to as the “IRA balance.”
How much must be withdrawn?
Good news! This question is easy to answer because changes were made in 2002 to the distribution rules for IRAs. Unless you are married to someone more than 10 years younger than you, the following chart determines the divisor that is applied to your IRA balance each year to calculate your mandatory withdrawal. If your spouse is more than 10 years younger than you, the divisors are different, but even more in your favor. Consult a tax publication or your C.P.A. for more details.
The annual mandatory withdrawal is calculated by dividing your IRA balance, as of the previous year-end, by the divisor from the Uniform Lifetime Table below. The divisors were increased slightly as of April 17, 2002, allowing slightly smaller mandatory distributions going forward.
For example, if Joe turns 70½ during 2011, he will use his IRA balance as of December 31, 2010, to calculate his 2011 mandatory withdrawal. He will use the divisor that corresponds to his age as of December 31, 2011. If he has turned 71 during the year, his first mandatory withdrawal will use the divisor for age 71 (26.5, from the table below). If he is still 70 as of December 31, 2011, he will use the divisor for age 70 (27.4 from the table). In either case, Joe divides his IRA balance by the divisor to determine his first mandatory withdrawal. If Joe’s IRA balance is $500,000, and he is still 70 as of December 31, 2011, his 2011 mandatory withdrawal will be $18,248.18 ($500,000 / 27.4). If Joe has turned 71 by December 31, 2011, his 2011 mandatory withdrawal will be $18,867.92 ($500,000 / 26.5). In any case, a C.P.A. or financial planner should be consulted if you have any questions about your first withdrawal.
Uniform Lifetime Table (as of April 17, 2002)
|
Age of Employee
|
Divisor
|
Age of Employee
|
Divisor
|
|
|
70
|
27.4
|
93
|
9.6
|
|
|
71
|
26.5
|
94
|
9.1
|
|
|
72
|
25.6
|
95
|
8.6
|
|
|
74
|
23.8
|
97
|
7.6
|
|
|
75
|
22.9
|
98
|
7.1
|
|
|
76
|
22.0
|
99
|
6.7
|
|
|
77
|
21.2
|
100
|
5.9
|
|
|
78
|
20.3
|
101
|
5.9
|
|
|
79
|
19.5
|
102
|
5.5
|
|
|
80
|
18.7
|
103
|
5.2
|
|
|
81
|
17.9
|
104
|
4.9
|
|
|
82
|
17.1
|
105
|
4.5
|
|
|
83
|
16.3
|
106
|
4.2
|
|
|
84
|
15.5
|
107
|
3.9
|
|
|
85
|
14.8
|
108
|
3.7
|
|
|
86
|
14.1
|
109
|
3.4
|
|
|
87
|
13.4
|
110
|
3.1
|
|
|
88
|
12.7
|
111
|
2.9
|
|
|
89
|
12.0
|
112
|
2.6
|
|
|
90
|
11.4
|
113
|
2.4
|
|
|
91
|
10.8
|
114
|
2.1
|
|
|
92
|
10.2
|
115+
|
1.9
|
When must the first mandatory distribution occur?
This is where things get a little tricky. The initial mandatory distribution must occur by April 1 in the year after you reach age 70½. However, each subsequent distribution must occur by December 31 of each following year. Let’s look at an example: Joe turns 70½ in May 2011. His first mandatory distribution must be completed before April 1, 2012. However, his next annual mandatory withdrawal must occur before December 31, 2012, with each annual distribution that follows due by December 31 of each subsequent year.
When should the first mandatory distribution occur?
So, Joe has a choice to make. He could take his first IRA withdrawal before the end of 2011, or wait until 2012, so long as it will be completed before April 1, 2012. If he makes the withdrawal in 2011, he will owe income taxes on his withdrawal, as regular income received in 2011. However, if he waits until 2012 (before April 1), he will be required to make two distributions in 2012—one for his initial distribution, and one for the second distribution, due before December 31, 2012. In this case, each distribution is taxed as regular income in 2012.
If Joe does not need the IRA distributions to cover living expenses, he has options. If taking two distributions in one year will not move Joe into a higher tax bracket, perhaps waiting until early 2012 to make the initial withdrawal should be considered. If Joe has a large IRA balance, he may want to consider making the initial withdrawal in 2011, and paying the taxes sooner—possibly at a lower tax rate.
In either case, Joe must make a withdrawal for 2012 sometime during that year. The 2011 distribution can be delayed until March 31st, only because it is the first distribution. So, this is the question Joe must ask: Am I better off making my initial mandatory withdrawal before the end of 2011, or between January 1 and March 31 of 2012? The answer should be relatively easy to determine, based on how much income Joe receives in retirement. If his income is very limited, making two mandatory withdrawals in 2012 might not pose a problem. If his income already puts him in a higher tax bracket, and the balance in the IRA is substantial, the initial withdrawal probably should be made in 2011.
Remember, the IRS penalty for not making a mandatory withdrawal is severe—50% of the required withdrawal! If Joe’s initial withdrawal is $10,000, and he does not make a withdrawal before April 1, 2012, a $5,000 tax penalty will be assessed. Therefore, Henssler Financial always recommends that individuals consult a C.P.A. if any questions about mandatory withdrawals need to be answered. For more information regarding this topic, please contact Henssler Financial at 770-429-9166 or at experts@henssler.com
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
