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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