IRAs are a common investment tool that many people use within their portfolios. But like with any tool, knowing the ins and outs of how they can be used can be tricky at times. Below are some frequently asked questions as well as some general rules when it comes to an IRA.
Tax Legislation Updates: Qualified Charitable Distributions are available for 2011 but have not been extended for 2012 and future years.
Tax extension legislation in 2010 included an extension of Qualified Charitable Distributions from IRAs through 2011 only. As of December 13, 2011, there have been no additional extensions of that legislation for 2012 and future years. This allows eligible customers to direct distributions from their IRAs to qualified charities and have that count toward the MRD for the tax year 2011. For the tax year 2011, customers have until December 31, 2011 to make a QCD that would count towards their 2011 MRD. Customers may make distributions totaling up to $100,000 to qualified charities for 2011.
What are Minimum Required Distributions (MRDs)?
Beginning for calendar year in which you turn 70½, you are generally required to withdraw a minimum amount of money from your tax-advantaged retirement accounts each year. This amount is called a minimum required distribution, or MRD. Note that you can always take more than the MRD amount.
You generally have to take MRDs from any retirement account in which you contributed tax-deferred assets or had tax-deferred earnings. These accounts include:
- Traditional IRAs
- Rollover IRAs
- SIMPLE IRAs
- Most Keogh accounts
- Most 401(k) and 403(b) plans
Are there any exceptions?
Roth IRAs are an exception. You are not required to take MRDs from a Roth IRA during your lifetime, nor can you satisfy your Traditional IRA MRD requirement with a withdrawal from a Roth IRA. Also, if you continue to work beyond age 70½, and do not own more than 5% of the business you work for, you may be able to defer taking distributions from your current employer’s Keogh, 401(k), 403(b), or other employer-sponsored retirement plan until April 1 of the calendar year after the year in which you retire. Please consult your plan administrator to learn more.
How should I handle year–end transfers or rollovers?
The December 31 market value of each of your retirement accounts should be adjusted for any pending year end transfers or rollovers. For example, if assets were withdrawn from an IRA or qualified employer-sponsored plan within the last 60 days of the prior calendar year, and then a portion or all of those assets were rolled over to an IRA this year, you must add the amount of the rollover to the balance of your IRA as of December 31 of the prior year. This may also apply to year-end transfers not credited to your account until after December 31, unless the MRD attributable to the amount transferred was distributed from another IRA.
How are MRDs taxed?
MRDs are taxed as ordinary income for the tax year in which they are taken and will be taxed at your applicable individual federal income tax rate. MRDs may also be subject to state and local taxes. If you made nondeductible contributions to your IRA, you must calculate your MRD based on the total balance, but your taxable income may be reduced proportionately for the after-tax contributions. Please consult a tax advisor to learn more.
What if I made non–deductible contributions to my IRA?
Regardless of whether or not you made non-deductible contributions, you must use the MRD. If you have made non-deductible, after-tax Traditional IRA contributions (or if your account includes any after-tax rollover amounts), you will not have to pay taxes on the portion of your distribution that represents after-tax contributions, provided you have filed IRS form 8606 each year you made a non-deductible contribution. Remember, you will owe taxes on any earnings on those contributions.
When should I take my first MRD?
You generally have until April 1 of the year following the calendar year you turn 70½ to take your first MRD. This is known as your required beginning date, or RBD. In subsequent years, the deadline is December 31. If you turned 70 between July 1st of last year and June 30th of this year, you will be turning 70½ this year and will need to take your first MRD for this year.
How should I time my first MRD when it comes to taxes?
If you take your first MRD between January 1 and April 1 of the year after you turn 70½, you still need to take your second MRD by December 31 of the same year. Since IRA and Keogh distributions are taxed as ordinary income, this may push you into a higher tax bracket. Also note that if you take your MRD between January 1 and April 1 of the year after you turn 70½, your December 31 account balance is not reduced by the amount of the MRD taken for the first withdrawal carefully.
Taking Your MRDs Each Year
How should I take my MRDs if I have multiple non-Roth accounts?
If you have more than one non-Roth IRA, you must calculate the MRD for each IRA separately each year. However, you may aggregate your MRD amounts for all of your non-Roth IRAs and withdraw the total from one IRA or a portion from each of your IRAs. If you have qualified plan accounts in addition to your IRAs, you must calculate and satisfy your MRDs for IRAs separately from your qualified plan accounts. If you have more than one qualified retirement plan account, you must calculate and satisfy your MRD requirements separately for each qualified plan account. For example, if you have both a profit-sharing Plan and a self-employed 401(k), you must separately calculate and withdraw an MRD from each plan. Also, MRDs for inherited IRAs must be satisfied separately from your other IRAs.
What are the penalties if I miss a deadline?
The penalty for taking less than your minimum required distribution can be severe. If you withdraw less than the minimum required amount, the IRS may assess a penalty equal to 50% of the amount of the MRD not taken.
Do I have to take my MRD if I am still working?
Yes, with certain exceptions: (1) Roth IRAs are not subject to MRDs while you are living; and, (2) in some
circumstances you may delay MRDs from a Keogh, 401(k), 403(b), or other employer–sponsored retirement plan account until you retire, as discussed above in the section titled “A Few Exceptions”. If you are still working and have other tax–deferred retirement accounts in addition to your current employer’s workplace savings plan, you must satisfy your MRD for those other accounts each year beginning when you reach age 70½.
Can I still contribute to my IRAs while taking MRDs?
You can contribute to a Roth IRA after age 70½ as long as you have compensation and meet the eligibility requirements for modified adjusted gross income. Otherwise, you generally cannot contribute to any other kind of IRA in the year you turn 70½ or any year thereafter.
Beneficiaries and Stretching Tax Advantages of Assets
Why is it so important to consider beneficiaries when taking MRDs?
Retirement accounts generally pass outside the instructions of a will. Your beneficiary designations will
determine who receives your retirement assets upon your death. That’s why it is so important to carefully consider whom you have designated as a beneficiary on your accounts. Also, there are opportunities for beneficiaries to stretch out the tax-deferred growth of IRA assets after the death of the original account owner. With proper planning, many beneficiaries can minimize their required distributions and potentially maximize the advantage of continued tax deferral.
Should I convert to a Roth IRA?
If you have been thinking about converting Traditional IRA assets to a Roth IRA, you should consider making that decision before beginning MRDs because Roth IRAs are not subject to MRDs during the account owner’s lifetime.
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FMR LLC is a Fidelity Investments company. The content provided above is general in nature and is for informational purposes only. This information is not individualized and is not intended to serve as the primary or sole basis for your decisions as there may be other factors you should consider. Fidelity Investments does not provide advice of any kind. Fidelity Investments is an independent company, unaffiliated with C.H. Dean, Inc. Fidelity Investments has not been involved with the preparation of the content supplied by C.H. Dean, Inc. and does not guarantee or assume any responsibility for its content. 636402.1.0