Hitting the Restart Button on RMDs in 2010
For 2009, Congress suspended Required Minimum Distributions (RMDs) from IRAs and other qualified retirements accounts for taxpayers age 70½ and older, giving their retirement accounts a chance to recover from the market crash of 2008. This suspension was for 2009 only, and taxpayers must once again begin taking RMDs for 2010.
The purpose of RMDs is to prevent taxpayers from avoiding taxation on the retirement funds indefinitely. Generally, distribution begins in the year the IRA owner attains the age of 70½. To enforce the RMD withdrawals, the government imposes a penalty of 50% on any amount of under-distribution for a year.
Distributions for 2010 can be taken anytime before the close of the year. However, individuals who turned 70½ during 2010 can delay taking their 2010 distribution until 2011, provided their withdrawal is made no later than April 1, 2011. Delaying the distribution until 2011 will double-up the income in 2011 since the 2011 distribution will be required as well.
In some cases, distributions from a qualified retirement plan (but not an IRA) may be delayed until April 1 of the year following the year the employee retires from the employer maintaining the plan, even if the employee is already age 70½.
The minimum amount that must be withdrawn in a particular year is the fair market value of the IRA account divided by the number of years the IRA owner is expected to live (also known as the distribution period).
FAIR MARKET VALUE = MINIMUM
DISTRIBUTION PERIOD DISTRIBUTION
The value is based on the value of the owner’s account at the end of the business day on December 31st of the prior year. The life expectancy is determined from one of two IRS tables, the “Uniform Lifetime Table” or, in certain circumstances, the “Joint Life and Last Survivor Expectancy Table.”
For purposes of determining the minimum distribution, the RMD for each Traditional IRA account owned by an individual must be figured separately and the minimum amounts totaled. Then, the total can be taken from any combination of the accounts. If the owner chooses not to take the minimum distribution from each account, it is not uncommon for IRA trustees to require written certification that the owner took the minimum distribution from other accounts.
In addition to IRAs, qualified retirement plans, such as employer-provided defined contribution plans and individual retirement annuities, are subject to the RMD rules. Be aware that distributions must be determined separately for each type of account. Thus, for example, distributions from a tax-sheltered annuity do not satisfy the distribution requirements from IRAs.
Advance planning can, in many cases, minimize or even avoid taxes on Traditional IRA distributions. Often, situations will arise where a taxpayer’s income is abnormally low due to losses, extraordinary deductions, etc., where taking more than the minimum in a year might be beneficial. This is true even for those who may not be required to file a tax return but can increase their distributions and still avoid any tax.
If you need guidance with your planning needs, please call this office for assistance.
