Making sense of all the IRA Options

What is an RMD? While it might sound a bit odd, it is actually a tool that reduces your IRA Account. The Required Minimum

Distribution (RMD) is a legal requirement by the federal government that at the age of 70 ½ holders of Traditional IRA Accounts

have to start withdrawing funds. Long story short, the government draws a line on how long its tax dollars can be deferred

before you have to pay. RMDs also apply to other retirement account such as 401Ks, 457s, 403b, and others.

RMDs are to be taken annually, and should be calculated according to how the IRS expects them to be done. Regardless of

making a conversion in a given year, you’re still required to process and RMD while you have an approved tax-deferred IRA

account.

Depending on the date of your birthday, the first RMD you have will either be at the end of your calendar year at age 70 or 71.

Usually birthdays before June 30 take the RMD at 70 and those after June 30 take it at 71.

Roth IRA accounts, on the other hand, have no such requirement for RMDs. Since there is no tax to recover, it doesn’t make

sense to force people to withdraw funds before their personal preference is ready. This is a huge benefit because Roth IRA

holders could in concept hold their retirement accounts and instead pass them on to beneficiaries in their entirety. The tax

implications only result in the transfer to a beneficiary one time, not while the earnings grow (keep in mind a beneficiary will

have to take an RMD after five years of inheriting either a Traditional or Roth IRA account).

As a one-time tweak, Congress passed an exception to the RMD requirement in 2009 due to how badly the economy sunk that

year. It was considered popularly unfair to force people to have to liquidate market holding after such a bad market drop just to

meet a government rule. So the federal government gave folks a break for a year, allowing time to recover some of the losses

on the market.

RMDs are not a set maximum dollar amount. Your withdrawals can always exceed your minimum RMD amount. You just can be

lower than the RMD. Failure to do so will force a distribution anyways, and then you will suffer penalties with the IRS on top of

the taxes (50 percent of the amount that has failed to be withdrawn after an IRS review). It’s not worth the trouble trying to beat

the system.

The RMD amount for an individual depends on how much they have in traditional IRA accounts combined. Don’t make the

mistake that the RMD only applies to one IRA account and not others. The IRS treats all your pre-tax IRA accounts as one

jumbo Traditional IRA. So you have to take the total balances, what you think your earnings will be, and divide that aggregate

by your life expectancy. The result is the dollar amount you need to take out each year. Why include the earnings if they haven’t

happened yet? Well, if you don’t project them, you will likely be under withdrawn and suffer a penalty after the fact. It’s better to

take just a bit more than a straight minimum to be safe.

You can find much of the IRS’ requirements and explanations, including your life expectancy factors, in IRS Publication 590. It’s

also available for download off the Internet at the IRS website (http://www.irs.gov).

Documentation is critical to prove your case if questioned by the IRS when handling IRA Accounts. The first and most critical

paper to keep on file are your tax returns. The returns themselves are the information provided to the government which you

certified, so keep them safe. Keep the paper copies even if you scan them electronically (do both to be safe). The IRS has at

least three years after every filing to perform an audit. Supporting documents can be shredded after that time and kept

electronically.

Regarding your IRA accounts themselves, try to keep a library of your year-end documents that summarize your entire year of

activity. This is critical for proving what funds are deposits versus earnings in your accounts. Keep the monthly statements until

you get the year-end version, and then shred the monthly documents to reduce filing.

Of particular importance for Traditional IRA account holders, Form 8606 is important. This is the annual tax document that

certifies what you deposited in an account with nondeductible contributions. Again, this comes in handy later one when proving

deposits versus earnings.