A traditional IRA is funded with tax-deductible contributions. While it grows, the taxes on earnings are deferred. Consequently, the Internal Revenue Service does not get a chance to tax traditional IRA money until the account owner withdraws it. The IRS specifies the age at which withdrawals must be taken and spells out how to calculate the amounts of those required withdrawals. Roth IRA owners are not required to make withdrawals, but their non-spouse beneficiaries are.
Age 70 1/2 Rule
Once you reach age 70 1/2, you must begin taking what are called required minimum distributions from your traditional IRA. If you fail to take the RMD in any given year, the IRS imposes a 50 percent penalty tax on the amount you should have withdrawn. You can always try to have the penalty waived by submitting an explanatory letter to the IRS.
Required Minimum Distribution Calculation
The RMD is calculated by dividing the end-of-year account balance by the figure on an IRS life-expectancy table that corresponds to your age. Most IRA owners should use the Uniform Lifetime Table. If your spouse is more than 10 years your junior and is the sole beneficiary of your account, she should use the Joint and Last Survivor Table. If you are an IRA beneficiary, use the Single Life Expectancy Table.
Five-Year Beneficiary Option
If you inherit a traditional IRA, and the account owner had not started taking RMDs, you can choose to withdraw the entire amount left to you within five years of the person's death. During that period, you can remove as much or as little money per year as you like. Just be sure the account is drained by the end of the fifth year after the date of death.
IRA beneficiaries can also withdraw the balance in yearly installments that are tied to their life expectancy. These withdrawals have to begin by the last day of the year after the original account owner's death. This rule applies to non-spouse beneficiaries of Roth and traditional IRAs. To calculate the yearly amount, divide the end-of-year account balance by the figure on the IRS Single Life Expectancy Table that corresponds to your age. You have to calculate the amount each year, as your age goes up and the life expectancy figure goes down.
If you are a surviving spouse, you are allowed to roll the inherited IRA assets into your own IRA and treat them as your own. This means you can keep making contributions to your own IRA and allow the assets to continue growing tax-free. With a traditional IRA, if you are the sole beneficiary, you choose to take distributions over your lifetime and your spouse had already started taking RMDs, you don't have to start your RMDs until the year your spouse would have turned 70 1/2. If you roll a traditional IRA into your own IRA, you will have to take RMDs when you turn 70 1/2. If you roll a Roth IRA into your own Roth, you don't ever have to take distributions.
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