By Jane Marie Schaeffer, Esq.
As you approach retirement, you will be faced with choices about your IRA plans, and you will have many questions, such as how much will you be required to withdraw every year, and how will your distributions be taxed. This article will address some of those questions, and give you the information you need to make smart choices about your retirement plan.
1. When do I need to take withdrawals from my IRA?
You need to start taking distributions from your IRA the year that you turn age 70½. The distributions that you are required to take are called Required Minimum Distributions, or RMD. The distributions must be taken by April 1 of the year following the year in which you turn age 70½. So, for example, if you turn 70 on June 1, then you will turn 70½ on Dec. 1. You will need to take a RMD for 2018, but you have until April 1, 2019, to take the distribution. After the first year, distributions from your IRA must be taken by Dec. 31 each year.
2. How much do I need withdraw from my IRA?
Your RMD is calculated by taking the balance of your IRA account from Dec. 31 of the prior year, and dividing it by the appropriate distribution period from the IRS Uniform Lifetime Table. For example, suppose Mary is 80 years old and the balance in her IRA account on 12/31/17 was $120,000. Using the IRS table, her distribution period is 18.7 years. Her RMD for 2018 is $6,417.12 ($120,000/18.7=$6,417.12).
(The full table can be found on the IRS website).
3. How do I calculate my RMD if I have more than one IRA?
There is an opportunity to do a little bit of planning here if you have more than one IRA account. You calculate the RMD amount for each IRA separately. Then you can total the RMD amounts for all your IRAs, and you can take that amount from any one of your IRAs. This can allow you to decide which account to use to take your distribution from, based on the earnings in that particular account.
4. How is my RMD taxed?
Distributions from your IRA account are taxed to you at ordinary income rates. Because you received an income tax deduction for amounts that you placed into your IRA when you were working, you are now required to pay income tax on the distributions you receive from the IRA while in retirement.
5. What happens to my IRA when I die?
When you established your IRA account, you filled out paperwork that allowed you to name beneficiaries of your IRA account. Typically you will name your spouse as your primary beneficiary, and then your children as contingent beneficiaries.
It is always a good idea to check your beneficiary designations and make sure they are up to date. One benefit of having named beneficiaries is that your IRA account does not have to go through probate, and will pass directly to your heirs.
If your spouse is your beneficiary, then upon your death your spouse will typically roll over the IRA account into his or her own IRA account, and then be subject to the RMD rules if they are over the age of 70½. This is called a spousal rollover. If your children are your beneficiaries, then they receive the IRA as an inherited IRA, and are required to begin taking RMDs based on their life expectancy, even if they have not yet reached age 70½ .
However this does allow them to stretch receiving distributions over their lifetime, and allows the account to grow tax deferred.
IRAs are a wonderful tool to put aside money for retirement and to allow those funds to grow in a tax deferred manner. For many individuals IRAs can be a substantial source of income in retirement, and can also provide benefits to your spouse and children on your death. Just make sure you understand the rules regarding IRAs, and consult a qualified professional if you need advice regarding your IRA account.
Schaeffer is a senior associate with Herzog Law Firm PC.