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How to Manage Your IRA’s Mandatory Minimum Distributions

If you are going to reach your 70^th birthday soon, you will soon be making some important decisions about withdrawing the money that has been accumulating, tax-free, in your Individual Retirement Accounts (IRAs). The Internal Revenue Service has established some strict rules about how you should go about it, because the amounts you withdraw are taxable. The process is complex, and if you fail to comply with the regulations, you could be subject to substantial penalties. So, you need to have the guidance of a financial or tax advisor before you go about it.

What Kinds of IRAs Are Covered?

The minimum distribution rules apply to all IRAs. For Roth IRAs, the rules do not apply until after the IRA owner dies.

When Should You Begin Receiving Distributions?

First, you have to figure out when you will be 70-1/2, because that’s the milestone the Internal Revenue Service has chosen for your big decision about your first minimum distribution and those that will follow in the years to come.

Internal Revenue Service regulations dictate that the latest date on which you can take the initial distribution is April 1 of the year following the year in which you reach age 70-1/2. Let’s say that your 70th birthday falls in November 2002. You will be 70-1/2 by May 2003. So, you will have to take your first distribution by April 1, 2004.

However, even if you postpone your first distribution until April 1st, you will still have to take another distribution by December 31 of 2004. In effect, you will take twice the amount during the 2004 calendar year, and pay twice the taxes. Depending on your other income, this could put you in another tax bracket.

Based on your personal situation, you may prefer to get the first distribution during the year 2003, the year you reach the age of 70-1/2.

How Is the Amount of Your Minimum Distribution Calculated?

The amount of the withdrawal is calculated by dividing your life expectancy into the balance in your IRA account at the end of the previous year. The bigger your life expectancy, the lower your required distribution – and the tax you owe – will be. Recently, the agency updated its tables to reflect the improved life expectancies. This change will result in lower distribution amounts and lengthen your IRA’s tax deferral advantages. Your tax advisor can help you calculate your distribution amount. This and other information is available online in the IRS publication 590.

If you have more than one IRA you will determine the distribution for each separately. Of course, if you want to take a larger amount in each distribution, you are free to do so.

September 26, 2002

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