1 . When do I need to take withdrawals from my IRA ?
Regardless of when you actually retire , you are required to start taking distributions from your IRA for the year that you turn age 70 ½ . The distributions that you are required to take are called Required Minimum Distributions , or RMD for short . The distributions must be actually taken by April 1st of the year following the year in which you turn age 70 ½ . So , for example , if turn 70 on June 1 , 2017 , then you will turn 70 ½ on December 1 , 2017 . You will need to take a RMD for 2017 , but you have until April 1 , 2018 to take the distribution . After the first year , distributions from your IRA must be taken by December 31st of 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 December 31st 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 / 16 was $ 120,000 . Using the IRS table , her distribution period is 18.7 years . Her RMD for 2017 is $ 6,417.12 ($ 120,000 / 18.7 =$ 6,417.12 ). See the chart on opposite page of the IRS table ( 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 , 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 beneficiaries .
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 70 ½ .
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 70 ½ . However this does allow them to stretch receiving distributions over their lifetime , and allows the account to grow tax deferred .
Conclusion
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 such as a certified public accountant if you need advice regarding your IRA account and the tax impact specific to your fact pattern .
For other estate planning questions , or for a free consult , call Herzog Law Firm at
( 518 ) 465-7581
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