Understanding IRA Required Minimum Distributions


One thing I love about writing this column is that if I make a mistake or create confusion, readers are quick to let me know! I always strive for perfection and typically have one or two other professionals review my column before sending it to our editor but sometimes there are still mistakes…as from last week’s column:
Tax deductibility of charitable contributions. In my response to a reader’s question about how much tax savings would he realize on his $4,800 contribution to his church, I told him to expect a full tax deduction and total tax savings (federal and state) of about $1,540. A reader was quick to point out that there is no tax deduction unless you file the long tax form and itemize deductions. He added that with a relatively high standard deduction for joint filers and relatively low mortgage interest rates, many more people now use the short tax form.
Required Minimum Distributions once you turn age 70½. This reader asked about when she must begin taking Required Minimum Distributions (RMDs) from her retirement plans. Here, a typographical error lead to a confusing answer. One reader corrected me so eloquently that I’ll use his response: “Distributions from traditional IRAs (and qualified plans, 403(b) plans, SEPs and SIMPLE plans) must generally begin for the calendar year that the retirement plan owner attains age 70½. The retirement plan owner can make the first RMD in the calendar year he or she attains age 70½ or can choose to delay receipt of the first distribution until April 1 of the following year. Thereafter, the RMDs for each year must be made by December 31. Thus, if the first RMD is delayed until April 1 of the following year, the second RMD must be made by December 31 of that same year. In the example you gave of turning 70½ in February 2013, the first required distribution would not be due until December 31, 2013, or April 1, 2014 at the latest.”   He went on to further note that RMDs do not apply to Roth IRAs. So, for the reader who had this question, if she were to wait until April 1, 2014 to make her 2013 RMD, she’d also have to make her 2014 RMD by December 31, 2014! This is why, generally, I recommend taking your first RMD in the calendar year that you turn age 70½.
Another reader asked if I’d take some of the mystery out of Required Minimum Distributions by discussing how the RMD is calculated.
As we stated, once you turn 70 ½, the government says you must begin taking money from your retirement accounts. Why? Because they want more taxes! The amount you are required to take is based on government tables that take into account life expectancy. For example, at age 70, the government uses 27.4 years as the distribution period. To determine the amount you must take that year, you divide the total value of your retirement investments as of December 31 of the prior year by this factor. Assuming all of your retirement accounts totaled $100,000, your calculation would look like this: $100,000 divided by 27.4 equals $3,650 which is the amount you must take the first year. Every year you live, your life expectancy goes down a little bit so you must recalculate your RMD.   
For an RMD worksheet that includes the full life expectancy table, visit the Resource Center at www.WelchGroup.com; click on ‘Links’; then click on ‘Required Minimum Distribution Worksheet’.