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December 7, 2012
Don’t let the little issue of RMDs or required minimum distributions get lost in the blur of the holiday season. The IRS makes it painfully clear that they are envious of those of you that are over the age of 70.5 and have an IRA or other retirement plans. Interestingly, the Roth IRA holders are spared the indignity of the government telling them how to manage their finances, but more about that later.
If you hold a non-Roth IRA and had your 70th birthday before July 1 of 2012, you must take a minimum distribution from your plan. In other words, make what was tax deferred, now taxable. How much must you take out? It is based on an IRS provided table that calculates your estimated life expectancy. How much is it? Well, if you turned 70.5 this year, you will be forced to take a distribution of a little over 3.6% of your holding. My mother, age 92, is required to take out 9.8%. For those of you yearning to know more, consult IRS publication 590 for the rules and tables.
All non-Roth IRAs are added together to calculate the RMD, and distributions can be made out of any of the held IRAs to meet the distribution requirements.
IRA holders that are in or near their RMD years should plan for sufficient liquidity in their plans to permit the easy withdrawal of funds as required. This withdrawal can take place anytime during the calendar year – but if not done by December 31st, a penalty of 50% of the undistributed amount will accrue to the IRA holder.
Those that have contributed or converted to a Roth IRA are not forced to take any distribution during their lifetime, as all taxes have already been paid.
So, two end-of year reminders: If you are nearing or over seventy years of age and have pre-tax IRAs, get prepared, and take the distributions as required. If you wish to convert to a Roth this year, you must do so before December 31st. Talk to your tax professional before the end of the year so you make all the best moves.
As always, all the best in your investments,