Do you own an IRA? Depending on how you became the owner of that IRA will dictate how you must make withdrawals from the IRA. As is the case with all traditional IRA’s Uncle Sam wants his share of the taxes associated with the IRA that someone owns. And all traditional IRA’s at some time will have required minimum distributions (RMD). But how and when the RMD starts and is treated depends on how ownership was established for the IRA.
If someone is the original owner of the IRA their RMD will start April 1st of the year after they turn age 70 ½. In these instances the RMD must be done prior to December 31st to avoid very costly penalties from the IRS. In the event someone does not take their RMD the IRS will impose a 50% penalty on what should have been the RMD. As an example if someone’s RMD is $5,000 the penalty would result in the loss of $2,500. As an original owner the RMD is determined by using IRS Table III or the Uniform Lifetime Table. This is the table used for most owners and their spouses. The exception is when a spouse is more than 10 years younger than the owner who is 70 ½. In these cases Table II or the Joint Life and Last Survivor Table. These couples will see a lower RMD than a couple whose ages are within 10 years of one another.
A spouse who inherits an IRA has a few options available to them. They may keep the IRA as a beneficiary and will be required to take the RMD when their deceased spouse turned 70 ½. In these instances the spouse will use Table I which all beneficiaries must use. Or the spouse may roll the IRA over into their own IRA where RMD’s will not be required until the spouse that inherits the IRA turns 70 ½. Whether to keep an IRA as an owner by rolling it into an existing IRA or as a beneficiary check the corresponding tables and see which results in the lower RMD.
Non-spouse beneficiaries must use Table I and may not roll the IRA over into their own IRA. But these beneficiaries make RMD’s a little differently than a spouse or original owner. If a beneficiary is 55 when they inherit an IRA their RMD factor is 29.6. The following year their RMD factor would be 28.6 as it is reduced by one each of the following years. That is compared to a RMD factor of 28.7 according to Table I. Over time the RMD factor will decrease faster for a non-spouse heir as compared to an original owner.
The key is to know when you have to begin RMD’s, know what table to use and calculate the correct RMD amount or face hefty penalties.
