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Overview
In 1974, the federal government established Individual Retirement Accounts (IRA) as a way for taxpayers to set aside money for their retirement and mandated that the IRA not be used until a person turned 59 ½ years of age. However, if the regular IRA contained a balance when that person became 70 1/2 years old, the government stipulated that a certain minimum amount must be withdrawn each year thereafter. Under rules set forth by the IRS in 2002, it simplified determining that amount by providing a chart based on actuarial tables.
Time Frame
By the 2002 rules, when you reach 70 ½ years of age, you will have until April 1 of the following year to make your minimum distribution. That distribution will be based on the value of your IRA on December 31 of the year preceding that in which you turned 70 ½. For example, if you turned 70 ½ in 2007, you will have until April 1, 2008 to make your distribution, and it will be based on the value of your IRA on December 31, 2006.
Tax Consequences of Delay
If you wait until April 1st of the year following that in which you turned 70 ½, you will be taxed not only on that distribution but the one you must make by the end of that year. For instance, if you turn 70½ in 2008, made your initial distribution on April 1, 2009, you must make a second distribution by December 31, 2009. It is best to assess your tax situation before the end of 2008 before delaying payment until April 1, 2009.
Features
Prior to the rules being changed in 2002, calculating the amount you were required to withdraw was a mathematical nightmare. You were asked many questions and you were given alternative methods to make the calculation. In the new rules, you simple need to refer to a chart when armed with your regular IRA balance and your age. The only exception is if you are married to someone who is more than 10 years younger than you and is the only beneficiary of the account. Under that circumstance, you will be required to make a smaller distribution because you will be blending the ages of the two of you.
Inheritance
The beneficiaries of your regular IRA will take their withdrawals based on their life expectancy. This information is found on another table provided by the IRS. If your spouse is the sole beneficiary, he or she will be able to defer withdrawals until reaching 70 ½.
Warning
While the IRS has greatly simplified the way you determine your distribution, it has not budged for those taxpayers who ignore the distribution rule. Under most circumstances, it will impose a penalty of 50 percent of the amount that should have been distributed. Obviously, it is in every taxpayer's interest to avoid this penalty by making the proper distribution.
Roth IRAs
With a Roth IRA, you make contributions with after-tax dollars, but the account accumulates with no further income tax on distributions. For that reason, there is no obligation to begin making distributions when you are 70 1/2 years of age.
