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IRAs Traditional IRA Education IRA Freedom IRA (not a CD type) Roth IRA Back to Main
ALL ABOUT TRADITIONAL IRA DISTRIBUTIONS
Who is eligible to contribute to an IRA? Every individual who has earned income or received alimony may contribute to an IRA. Income from other sources such as investments or inheritances does not qualify. Contributions may not be made for or after the year in which you reach age 70 1/2. How Much Can I Contribute To A Traditional IRA? YEAR 2007 You can contribute all or part of compensation up to: Total yearly contribution that can be made by an individual to all IRAs, Traditional (deductible, nondeductible) and Roth IRAs, is $4,000 not counting rollover contributions. CATCH-UP CONTRIBUTIONS FOR PEOPLE 50 AND OLDER To make up for lost time, workers 50 and older before the end of the taxable year can make additional contributions above the new maximum limits as follows:
The Most Often Asked Questions? Individual Retirement Accounts (IRAs) were created specifically to encourage people to save for retirement. Incentives include deferring taxes on earnings until funds are withdrawn and, in some cases, a tax deduction for contributions. As attractive as it is to save through an IRA, there comes a time when you'll want or need to withdraw your funds. This brochure will help you plan ahead by answering the most often asked questions about IRA distributions. What Are The Regulations Governing IRA Withdrawals To discourage people from withdrawing funds, the federal government imposes a penalty for early distributions. There is a 10% penalty for withdrawing all or any part of the account before age 59½, with the following exceptions: Once you reach age 59 ½, you can begin taking money out of your account without penalty. However, many people prefer to leave their funds untouched until they actually need them. This allows their money to continue to grow through tax-deferred interest compounding. You are required to begin taking distributions from your account once you reach age 70 ½. Government regulations specify a minimum amount you must withdraw each year. Failure to do so will result in substantial penalties, 50% of the amount you should have withdrawn, but didn't. It is important to remember that, if you have withdrawn money at any time prior to age 70 ½, you cannot count those withdrawals toward your required minimum upon reaching 70 ½. Likewise, after age 70 ½, if you take more than the required minimum distribution in one year, you can't reduce a future year's minimum distribution by the excess. When Must Distributions Be Taken? If your 70th birthday falls on or before June 30th of a given year, you must take your first distribution no later than April 1st of the following year. If you turn 70 on or after July 1st, you don't reach 70 ½ until the following year - and, therefore, don't have to take your first distribution until April 1st of the year after that. Your second and subsequent distributions must be made by December 31st of the year to which they apply. To make this more clear, here's an example. If you turn 70 in June of this year you may take your first distribution any time up until April 1st of next year. You will be required to take your second distribution by December 31st of that same year. If you turn 70 on or after July 1st of this year, you may take your first distribution any time up until April 1st of the year after next. And you will be required to take your second distribution by December 31st of that same year. What About Taxes? Earnings from your Individual Retirement Account funds are taxed as ordinary income. Your original contributions may or may not be taxable, depending on whether you took a tax deduction when you made them. If you have made both deductible and nondeductible contributions to your IRA, you will be required to take proportionate distributions of both. Your tax advisor can help you calculate the portion on which you must pay tax. What Are Your Options For Distributions? There are two basic options for Traditional IRA distributions after age 59 ½ without penalty. 1. You may take normal distributions from your IRA account at anytime. 2. You must begin to take Required Minimum Distributions (RMDs) from your Traditional IRA in the year in which you reach age 70 ½. Or you may take sums larger than the RMDs as you need them. Let's Look At Each Option. The first option, withdrawing all or a portion of your funds, has one distinctive disadvantage. The amount withdrawn will be subject to taxation as ordinary income in a single year. This could result in a substantial tax liability for you, and a significant decrease in the amount of money you can actually use for your retirement. The second option requires you to take the RMD in the year in which you reach age 70 ½. You must take the distribution for the first year by your Required Beginning Date (RBD). Your RBD is April 1st of the year following the year you reach age 70 ½. December 31st of each subsequent year is the date by which you must take distribution for all subsequent years. You may elect to take sums larger than the required RMDs, if you need the money to meet expenses. Bear in mind, however, that you will be taxed on the amounts you withdraw. And you run the risk of depleting your funds within your lifetime. An important note: The information contained in this website is not intended to provide specific advice or recommendations for any individual. We suggest that you consult your attorney, accountant, tax or financial advisor with regard to your personal situation.
NEW CHANGES AND RULES
Do The New Rules For Traditional IRA Distributions Offer Any Advantages Over The Existing Rules?Since the new rules allow most people to take out less money, you may be able to cut your tax bill and also allow more of your IRA assets to continue to grow tax deferred. How Do You Calculate Your Required Minimum Distributions (RMDs)? Your RMD is calculated by dividing your Traditional IRA balance by a life-expectancy multiple. Generally, for most individuals the new rules provide a new life expectancy multiple that results in a lower RMD. Keep in mind that at any time, if you wish, you may take out more than your Required Minimum Distribution. How Do You Determine Your Traditional IRA Balance Used to Calculate Your RMD? The balance used in the RMD calculation is usually determined as of December 31 of the year before the year for which the distribution is being made. For example, the balance used to calculate a 2006 RMD is the December 31, 2005 balance. What If You Have More Than One IRA? The IRS permits you to take your required minimum distributions from the account or accounts of your choice. However, the amount of the minimum distribution must be based on the total of all of your accounts. While you're not required to consolidate multiple accounts, it makes a great deal of sense to do so. Consolidating makes your record keeping easier and enables you to keep a closer eye on this most important retirement savings fund. We would be happy to help you consolidate your accounts with us. How Do You Determine Your Life Expectancy When Calculating Your RMD? You can, in most cases, determine the applicable life expectancy multiple by using the Uniform Lifetime Distribution table (shown below). This table can be found in IRS Publication 590. Formerly, this table was called the "Minimum Distribution Incidental Benefit [MDIB] Table. To find the applicable life-expectancy multiple for the year, look up your age on your birthday in the year for which the distribution is being determined on the distribution table below and find the corresponding multiple. You will then divide your prior year December 31 Traditional IRA balance by this multiple.
Are There Any Penalties For Not Taking The Full RMD? Yes. If you withdraw less the RMD amount for any year, you will incur the IRS 50% excess accumulation penalty on the amount you should have withdrawn, but didn't. |
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