Dear readers,
This week's question deals with how to figure out your required distribution when you have to start mandatory IRA withdrawals. It's really quite confusing, as this reader attests. Four phone calls and not one person gave him the correct answer.

Gail --

I have asked this question of my CPA and then three calls to different people at the IRS. I have not received the same answer more than twice out of four times. Here it is:

I was born in May 1934 and my wife, who is my beneficiary, was born in October 1947. In 2004, I will turn 70, so I have to start withdrawing money from my IRA. What should my first "Required Minimum Distribution" be, based upon, 29.1, 28.4 or 27.6 as the factor?

Thank you,

Dickson

 

Dear Dickson:

Your quest has ended! I've got your answer and here's a hint: NONE of the above.

But first, for those who are not as familiar with this issue as you clearly are, let me provide a bit of background.

Money you have contributed to a tax-deductible IRA is allowed to grow on a tax-deferred basis as long as it remains inside the IRA. However, this doesn't last forever. When you reach what the IRS calls your "Required Beginning Date" you must start withdrawing at least a minimum amount each year. And, of course, you must now pay income tax on this amount.

Your "Required Beginning Date" is (are you ready?) April 1 of the year AFTER you turn 70-and-a-half. Huh?

Please don't shoot the messenger. I have no idea who came up with this as the starting date. But by using you as an example, Dickson, I'll attempt to shed some light on this.

Begin by determining when the IRA owner turns 70. In your case, it will be May 2004. Add six months to that and you have the date at which you turn 70-and-a-half. For you, Dickson, that will be November of this year.

So by law, you must take your first RMD NO LATER than April 1, 2005.

While this is the absolute latest date to take your first Required Minimum Distribution (RMD) from your IRA, you could, of course, take it this year if you wanted to. I know that most people hate the thought of taking a withdrawal -- and paying the income tax on it -- before they absolutely have to, but it often makes sense.

That's because if you wait until April 2005 to take your first RMD, you will have to take TWO withdrawals next year: one for 2004 and the distribution you're required to take in 2005. Bunching up your first two years' worth of RMDs could bump you into a higher tax bracket in 2005. Either you or your financial advisor should take a look at your tax situation to determine what, if any, impact this could have.

OK. We know the deadline for starting your Required Minimum Distributions. The next issue is, how do you figure out what the minimum withdrawal amount is?

This is actually pretty simple. You divide the previous year's ending value of your IRA by your life expectancy factor. You can find this number in IRS "Publication 590", which is available to view, order, or download by visiting the IRS website at http://www.irs.gov .

Unless your beneficiary is your spouse and is more than 10 years younger than you are, you will find your "factor" in the "Uniform Life Expectancy" table located in Appendix "C" of Publication 590. This table assumes that the IRA will be withdrawn over the lives of two individuals -- the IRA owner and his/her beneficiary. (Even if your beneficiary is not a person, i.e. it is a charity or your church, you will still use this table.) Find the life expectancy factor which corresponds to your age in the year for which you are taking your RMD.

For instance, let's assume for a moment that your spouse is just 5 years younger and you are taking your first Required Minimum Distribution in 2004. Your age at the end of 2004 will be 70 (you won't turn 71 until 2005).

Next to age 70 in the Uniform Life Expectancy table you find a life expectancy factor of 27.4.

The next step is to dig out your end-of-year statement from your IRA custodian to find out what your IRA was worth on Dec. 31, 2003. That is not a typo. Remember, you divide the value of your IRA at the end of the previous year by your life expectancy factor for the current year.

Let's suppose your IRA was worth $140,000 as of Dec. 31, 2003. Dividing that by 27.4 gives you $5,109.49. This is your first year's Required Minimum Distribution.

In your case, Dickson, your spouse is actually MORE than 10 years younger than you are. So you would not look up your "life expectancy factor" in the Uniform table. Instead, each year you would go to the "Joint Life Expectancy" table, which is also found in Publication 590. The advantage of this will soon become apparent.

Since you turn 70 this year and your wife turns 57, find where these ages intersect on the Joint Life Expectancy Table. The number happens to be 29.5.

So, instead of dividing your 2003 year-end IRA balance by 27.4, you will divide it by 29.5. This gives you $4,745.76 as your first year's required minimum distribution. Notice that it is less than the amount you would have to withdraw if you used the "Uniform" table (The bigger the denominator, the smaller the RMD). Obviously, the smaller your withdrawal, the less you will owe in income taxes.

When it's time to take your RMD for 2005, Dickson, you will find that your life expectancy "factor" is 28.6 -- for an IRA owner who is 71 and a spouse beneficiary who is 58. To calculate your RMD, you'll just divide the value of your IRA at the end of 2004 by 28.6.

One more thing. The Required Minimum Distribution is exactly what its name implies: the smallest amount you must withdraw from your IRA. As I've pointed out before, you are always free to withdraw more than this amount.

Hope that clears things up, Dickson,

Gail

P.S. If your IRA is of the "Roth" variety, the IRA owner never has to take a withdrawal, regardless of his/her age.

 

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