Once you reach the age of 70½ years, you might already be aware that it is necessary for you to initiate your IRA minimum distributions, as you are a participant of the conventional IRA account that comes along with a lot of tax benefits. The accurate amount of your IRA minimum distribution is calculated according to an IRS formula that divides your entire IRA balance (the total balance if more than one IRA) by your estimated life expectancy.
Normally, the documentation and the important calculations that are required for you to start receiving your IRA minimum distribution is completed by your IRA custodian (e.g. bank of securities firm). But the task to make sure that the payments for these IRA minimum distributions are done correctly, is your talk. It is therefore necessary to figure out how the IRA minimum distribution works. Also, if you have more than one IRA account and wish to take your IRA minimum distribution from only one account, you need to know how to calculate the required withdrawals on your own (as no IRA custodian will do this for IRAs held at other custodians).
The following are a few of the most frequently asked questions relating to IRA minimum distribution withdrawals, as well as their answers:
Q: If I withdraw an amount that is less than my required IRA minimum distribution or take a late IRA distribution, am I liable to pay a penalty?
A: Yes. Going by the IRS tax code, you will have to pay a 50% penalty on the funds that you didn't withdraw. This is in addition to the state and/or federal taxes. The only exception to this rule is if you, as the account holder, can demonstrate that the reduced or omitted IRA minimum distribution was due to reasonable error and that you're taking action to fix the situation. Though, it is most likely that it will be difficult to explain it to the IRS, so it's better to take the minimum IRA distribution withdrawal when required.
Q: Do I need to make an IRA minimum distribution from each IRA account?
A: You may take your required IRA minimum distribution from any combination of your IRA or just one. Here is an example:
Required withdrawal from IRA #1: $2,000
Required withdrawal from IRA #2: $2,500
Required withdrawal from IRA #3: $3,500
Total required IRA minimum distribution for the year = $$8,000. You may take the $8,000 all from IRA 31 or divide it amongst the IRA any way you choose. This flexibility can be helpful if you have an underperforming IRA and wish to drain that IRA faster.
Q: Is it possible to rollover my minimum IRA distribution to another tax-saving retirement account?
A: No, you are not eligible to rollover your IRA minimum distribution to another IRA, as it is not an eligible rollover distribution.
Q: What is a qualified charitable distribution
A: Rather than take your IRA minimum distribution by having your custodian send you a check, you instruct your custodian to setting you distribution directly to a charity. The advantage of this is that the distribution never flows through your tax return and will not increase your income. Although beyond the scope of this article your tax accountant can show you the advantages of this option. So if you have any charitable intentions, you should first use your IRA retirement funds for that purpose.
Lose a Fortune on Your 401k Rollover
If you do not do any of these correctly:
- Opt for a distribution rather than direct transfer
- Rollover company stock to an IRA
- Choose to rollover to a Roth IRA
- Rollover to your new employer’s 401k
- Rollover post-tax contributions