Individual retirement accounts provide you with important tax benefits. A traditional IRA allows you to deduct your contribution and shelters your investments from taxes until withdrawal. You have to pay taxes at your marginal rate on the money you siphon out of your traditional IRA and you normally must start taking minimum distributions after reaching age 70 1/2 or face a 50 percent excise tax on the amount you should have withdrawn.
Required Minimum Distributions
You must begin paying required minimum distributions (RMDs) by April 15 of the year following your 70 1/2th birthday -- this is the “required beginning date.” You must take another RMD by the end of that year and every subsequent year. Congress authorized a one-year suspension of RMDs in 2009 in response to the financial crisis then gripping the country. Calculate the amount of the RMD using the life expectancy tables in the appendix of Internal Revenue Service Publication 590. You can use your own age to determine life expectancy or can choose to use a joint life expectancy of you and your younger spouse. Roth IRAs don’t have RMDs. A Roth IRA doesn’t provide tax deductions but does allow tax-free withdrawals if you follow the age and holding period rules.
If you are the surviving spouse, you might be able to postpone RMDs -- it depends on the particular facts. If you are the spouse and sole beneficiary of the deceased’s IRA, you can suspend RMDs for up to five years, at which time you must distribute the IRA’s entire balance. You can instead make yourself the owner of the IRA and base RMDs on your own age. If your spouse is more than 10 years younger than you, you can base your RMDs on the a combination of the life expectancies of you and your spouse. In this case, if your spouse chooses not to become the owner of the IRA after your death, your spouse can continue to use the joint life expectancy table to figure RMD.
If your beneficiary is not your spouse -- or if your spouse declines to become the owner and you didn’t use joint survivorship life expectancies -- RMDs depend on whether you reached the required beginning date before you die. If you die after the beginning date, your beneficiary bases RMDs on the longer of you own life expectancy or that of the beneficiary. If you do not reach the required beginning date before death, your beneficiary uses his or her own age to determine RMDs. If you name multiple beneficiaries, the RMD of the oldest beneficiary, known as the designated beneficiary, determines the RMDs for all beneficiaries unless your divide the IRA into separate accounts -- if so, each beneficiary’s age determine his or her RMDs.
Qualified Charitable Distributions
You can satisfy your annual RMD partially or in full by making a qualified charitable distribution, or QCD. You must make the distribution to an organization that is eligible to receive tax-deductible contributions. By making a QCD, you reduce or avoid the need to pay taxes on a RMD. You can exclude up to $100,000 in RMDs per year using QCDs. If you file a joint return, your spouse can also exclude up to $100,000 through a QCD. To qualify, your IRA custodian or trustee must transfer the charitable contribution directly to the recipient.
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