THIS ARTICLE DISCUSSES
THE RULES ISSUED BY THE INTERNAL REVENUE
SERVICE ON APRIL 16, 2002. AS OF JANUARY
2016, THESE RULES STILL REMAIN VALID.
Everyone has heard the expression: “Don’t believe
anything you read.” Well, that saying applies to the
article that appeared last year on this site. It was
certainly true and accurate when it was written, but
it’s now a little outdated and obsolete.
You see our friends at the Internal
Revenue Service have finally issued
firm rules on how to calculate the
required distributions from IRAs. Until
now, the only guidance was
proposed regulations that were
first issued in 1987 and then
revised in January 2001. Now we
have final rules to follow.
Putting money into an IRA has
been a fairly simple task ever
since the IRA was first created
more than 25 years ago. For that
same quarter of a century,
figuring out how much you are
required to take from your IRA has
been a mathematical nightmare. There
were numerous options and pitfalls.
For some, making the wrong decision
forced their heirs to surrender the
IRA and pay tax on the full value of
the IRA all in one year. Well, under
the final regulations you can forget
about it! The IRS has unearthed most
of the hidden minefields and
calculating the socalled
“required minimum distribution” is
now a simpler task.
IRA owners will receive a
break under the new rules. This
is because the final regulations
include new life expectancy
tables. The new tables reflect
longer life expectancies and
therefore require smaller
distributions.
Under the 2002 new rules, some things haven’t
changed. For example, you must still start withdrawing
funds from your IRAs in the year you turn age 70.5. In
addition, while you must ordinarily take the withdrawal
by yearend, in the first year, you have until April 1
of the following year to disburse the IRA money.
However, if you do wait until the following year, you’ll
be forced to take two distributions in one year. For
example, if you turn 70.5 in 2015, you can wait until
April 1, 2016 to make your withdrawal based on your IRA
balance as of the end of 2014. Another withdrawal will
be required by December 31, 2016, based on your balance
as of the end of 2015. The lesson is that for the first
year of mandatory withdrawals, you should analyze your
tax situation before yearend to determine whether it’s
best to take the withdrawals in two different tax years
or bunch the mandatory withdrawals into one year. Under
the new rules, this might be the only decision you’ll
have to make.
The real impact of the new rules is felt when it
comes to calculating the amount of the required
withdrawal. Prior to 2001, to make this calculation we
needed to know the answers to a handful of questions,
like: Did you opt to recalculate your life expectancy?
What is the age of your IRA beneficiary? Did you change
beneficiaries? Is any beneficiary a charity? All of that
was history when the IRS issued new proposed regulations
in January 2001, and it’s still history under the final
regulations. Now all we need to know is your age and the
total balance in your IRA at the end of the prior year.
That’s because all IRA owners (with one exception) will
be on the same, longer distribution schedule. For
example, let’s say your IRA balance, as of the end of
2014, was $50,000.00. To calculate the minimum
distribution for 2015, you simply divide the $50,000.00
by the divisor for your age at the end of 2014. If you
are age 74, the divisor is 23.8 (under the old table the
life expectancy was 22.7). Therefore, the minimum
distribution for 2015 would be $2,101 ($50,000.00
divided by 23.8). The new table showing the divisor
for all ages is below. The only exception to this
table is if (1) you are married to a person who is more
than ten years younger than you and (2) she or he is the
only beneficiary on the account. In that case the
required amounts are even less than the amounts shown in
the table. To be exact, the required amounts are based
on the actual joint life expectancy of you and your
younger spouse.
Another benefit under the new
rules occurs when we die. Under
those rules, our IRA beneficiaries
will generally be able to take
withdrawals from our IRA over
their life expectancies. The IRS
has those life expectancies in
another table. If you have inherited
an IRA, you’ll need to look into the
new rules since you can also rely on
them to compute your year 2002 and
all future distributions. You can read more
about the “IRA beneficiary”
rules in another article.
The standard plan instructs you
to tap other resources before
using your IRA monies. After all,
it generally makes sense to
shelter your IRA or any other
taxdeferred account as long as
possible. Remember though, when
age 70.5 rolls around, you must start
to empty your IRA. If you fail to take
the minimum, the Internal Revenue Service
stands ready to confiscate 50% of the
shortfall. That’s the penalty if
you fail to take the minimum. In
the past, the IRS didn’t have a
way of knowing if you didn’t
comply. Now, however, in the years
to come, our IRA company will be
sending us and our partners at the
IRS a notice telling us the exact
amount we are required to take.
Uniform Lifetime Table. This
table is used for determining the
distribution period for IRA
distributions during the life of
the IRA owner. This table does not
apply where the spouse is the sole
beneficiary and is more than 10
years younger than the IRA owner.
This table may be used for 2002
distributions and is required for
2003 and thereafter.
Last revised 1/6/2016.
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