ASK KIM


Dealing With Required IRA Distributions

Kimberly Lankford

If you don't withdraw the right amount of money -- and do so by the deadline -- you'll be hit with a big penalty.



I turned 70#189; last year and took my first IRA required minimum distribution this April. A friend of mine told me that I'd have to take another distribution by the end of the year. Is this true? Why is that the case?

Your friend is right. You don't need to take your first IRA distribution until April 1 of the year after the year you turn 70#189;. That's considered your distribution for age 70. But you'll also have to take your distribution for age 71 in that year, too, which you must do by December 31. After that first year, you must make all required minimum distributions by December 31. If you don't withdraw the right amount of money, you'll have to pay a 50% penalty on the amount of money you should have withdrawn but didn't.

To calculate how much money you need to withdraw, take the balance of your IRA accounts as of December 31 of the previous year and divide it by the number you'll find in the IRS tables for someone your age. You can figure out how much you need to withdraw by using our Calculate Your Minimum Distribution calculator, or use the tables at the end of IRS Publication 590 (you'll need to use a different table at the end of that publication if your beneficiary is a spouse who is more than ten years younger than you).

Do the same thing by December 31 the following year, based on the previous year's account balance and the IRS divisor based on your new age.

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These rules only apply to traditional IRAs. You don't need to make any required minimum distributions from Roth IRAs.

Distribrutions from several IRAs

I have several IRAs. Can I satisfy the minimum distribution requirement from only one IRA instead of taking the money from each one?

Yes. Even though you'll need to calculate the required minimum distribution from each IRA, and then add them all up, you can take the money from whichever one you want.

Withdrawals are fully taxable if all of your money is in tax-deductible IRAs. If some of your money is in nondeductible IRAs, then a portion of your withdrawals will be a tax-free return of principal, while the earnings (and tax-deductible contributions) will be taxable.

Avoiding penalties

Is there any way I can avoid the 50% penalty if I don't take my required IRA distributions after age 70#189;?

The IRS may waive the penalty if you have a good excuse, such as if illness prevented you from making the required withdrawal or if you relied on bad advice about how much you were required to withdraw. Otherwise, once you reach age 70#189;, you have to withdraw a minimum amount from a traditional IRA each year. The amount is based on your life expectancy and is designed to get all the money out of the account -- with tax paid -- by the time you die. See our Calculate Your Minimum Distribution calculator to figure out how much you need to withdraw.

Also there is now another way to avoid paying taxes on your IRA withdrawals. You'll still need to make your required minimum distributions by the deadline (April 1 of the year after the year you turn 70#189;, December 31 after that), but a new tax law now lets you donate up to $100,000 per year from your IRA tax free to a charity in 2006 and 2007. To qualify, you must be at least 70#189; when you make the contribution. The donation satisfies the rules for required minimum distributions, and donated amounts won't be taxed or included in your adjusted gross income. If you were planning to contribute money to a charity anyway, this is a great way to avoid the income-tax bill on gains in your IRA, which are taxed at your income-tax rate. You can't double dip deductions, though. You won't be able to take a charitable deduction for any portion of these withdrawals that would have been taxable otherwise. For more information about this new rule, see Transfer IRA Distributions to Charity.

Got a question? Ask Kim at askkim@kiplinger.com.




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