Tax Tips
Deadline Nears for Mandatory IRA Distributions
But you can direct up to $100,000 of your annual distribution to charity.
By Mary Beth Franklin, Senior Editor, Kiplinger's Personal Finance
December 16, 2011
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If you are at least 70½ years old, you must take a taxable distribution from your traditional IRA or employer-provided retirement plan by the end of the year. If you miss the December 31 deadline, you'll be hit with a stiff penalty equal to half of the amount you failed to withdraw.
SEE ALSO: 12 Year-End Tax Moves to Make Now
But there's an exception if you're still on the job. Employees who continue working past age 70½ are not subject to mandatory distributions from their company retirement plans until they retire. However, they still must take distributions from their IRAs.
IRA owners who turned 70½ between July 1 and December 31, 2011, can delay their first distribution until April 1, 2012. But if they do, they have to take a second distribution by December 31, 2012, and an annual distribution by December 31 every year after that. A double payout could substantially boost your 2012 income -- and your 2012 tax bill.
Mandatory distributions also apply to owners of inherited IRAs and other retirement accounts. You can either take annual distributions based on your own life expectancy or follow another set of distribution rules that require you to empty an inherited IRA by the end of the fifth year after the owner's death. Although there are no required minimum distributions for Roth IRA owners -- regardless of age -- non-spouse beneficiaries who inherit a Roth are subject to the mandatory distributions.
Of course, you can always withdraw more than the minimum amount required by law, but you'll pay taxes at your ordinary rate on the entire amount you withdraw from traditional IRAs and other tax-deferred retirement accounts (except for any portion that represents after-tax contributions). Withdrawals of earnings from Roth IRAs are tax-free once the account has been opened five years and you are at least 59½ years old. (Because Roth contributions are made with after-tax dollars, you can withdraw your contributions at any time, regardless of age).
If you're in a charitable mood, you can support your favorite cause and trim your 2011 tax bill at the same time. Retirees who are 70½ or older can direct up to $100,000 of their IRA distribution directly to a charity and exclude the donated amount from taxes. You can't double dip and claim a tax deduction for your charitable contribution, but by excluding your donation from your adjusted gross income, you'll lower your tax bill and possibly qualify for other tax breaks tied to income limits.
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Reader Comments (3)
Posted by: clydewolf at 11/25/2009 08:32:52 PM
"So if you received regular distributions every month, for example, then you can put only one of the withdrawals back in." Put one monthly payment back into the Traditional IRA. Then Convert the last 2 montly payments that are still within the 60 day window to a new ROTH IRA. Thus you can preserve more of your retirement savings in an IRA. Taxes would need to be paid on the ROTH IRA Conversion amount. This Conversion is OK only in 2009 because there is no RMD.
Posted by: George Carlson at 11/30/2009 09:26:08 AM
The last paragraph about rolling some of your normally required distribution into a Roth IRA misses a very important point. Depending on your tax situation including deductions, you may be able to roll a substantial amount of your normally required distribution into a Roth IRA at a lower incremental tax rate than your incremental tax rate next year when required distributions resume. For example, your incremental federal tax rate with required distributions may be 25%, but without the required distribution it may be 15%. This year may be the only opportunity you will have to roll into a Roth a portion of your IRA at this reduced tax rate. You save 10% on the amount converted (plus maybe some state tax) and you don't pass on the 15% income. A win-win.
Posted by: mal fukumoto at 12/03/2009 11:12:25 PM
"You don't need earned income to convert a traditional IRA to a Roth, but to qualify, your income--not counting converted amounts--can't top $100,000 in 2009." Please define income as we are both retired and received no earned income but retirement pensions as shown on the 1099-R. What is the income limit for 2010?