NEW YORK (CNNfn) - This is serious. We're down to the final days of 2000. If you are required to withdraw from your IRA by the end of the year, you'd better get going. It's a staggering 50 percent penalty if you forget. That's 50 percent of the amount that should have been withdrawn.
If you are not sure whether or not you need to withdraw by year-end, this guide will help you.
IRA owners
If you turned 70-1/2 years old in 1999 or earlier, then you must take your regular IRA distribution by the end of this year.
In case you are not sure whether you are in this group -- and believe me, many IRA owners really can't figure this out -- this group includes any IRA owner born before July 1, 1929.
If you turned 70-1/2 years old in 2000 that means you were born between July 1, 1929 and June 30, 1930 -- your first distribution is not required until April 1, 2001, so you are not under pressure to withdraw by the end of 2000. But you may want to voluntarily take your first distribution, the one that is not due until April 1, 2001, by the end of this year. This way you will avoid what I call the "Double Distribution Tax Trap" next year.
If you wait until April 1, 2001 to take your first required withdrawal, you will also have to take your second required distribution in the same tax year. That will cause a bunching of income from the first two required distributions into one tax year. This will generally increase the overall tax.
That's why for most IRA owners, the better option is to take your first distribution by the end of this year. You'll spread the two distributions over two tax years, which for most of you will lower the tax in each year. The only exception to this approach would be if you expect to be in a much lower bracket in 2001. Then it might pay to hold off this year and take your first two required distributions next year. If your tax bracket will be about the same each year, then you should get going and withdraw by year-end, even though you are not required to.
IRA beneficiaries
Yes, IRA beneficiaries are subject to the same 50 percent penalty for missing a required distribution. There are two kinds of IRA beneficiaries; Spouses and non-spouses.
If you inherited an IRA from your spouse, you need to know if your spouse died before, on, or after his Required Beginning Date (RBD). The RBD for most IRA owners is April 1 of the year following the year you turned 70-1/2.
If your spouse died before his RBD and you rolled his IRA over to your own IRA, then you are treated as if you were the original IRA owner. In that case, you would be required to withdraw by year-end only if you turned 70-1/2 years old in 1999 or earlier.
However, if you did not roll over until 2000, then a distribution is not required by the end of this year. In that case, if you are over 70-1/2 years old, you have until Dec. 31, 2001 to begin required distributions.
If your spouse died before his RBD, and you did not roll his IRA over, the rules are different. In this case, a distribution would only be required if your spouse would have turned 70-1/2 years old in 2000, had he or she lived.
If you inherited an IRA from your spouse who died in 1999 or earlier, on or after his RBD, and you are already past age 70-1/2 years old, you must withdraw at least the minimum required amount by year-end.
If you inherited an IRA from a spouse who died in 1999 or earlier, on or after his RBD, and you did not roll over, then you must withdraw at least the minimum required amount by year-end, regardless of your age.
If you are a non-spouse beneficiary that is, a child, brother, cousin, friend, etc. -- and you inherited an IRA from someone who died in 1999 or earlier and before his RBD, you are not required to withdraw by year-end.
However, you should in order to preserve your option to spread required distributions over the rest of your life. If you do not withdraw by year-end, you will have defaulted to the Five Year Rule, a distribution method that severely limits the payout period compared to your life expectancy.
If you are a non-spouse beneficiary, or a spouse who did not roll over, and you inherited an IRA from someone who died before his RBD, and you are under the Five-Year Rule, you must withdraw the entire balance of the inherited IRA by year-end.
That's right, whatever is left in the IRA account must come out by year-end or be subject to the 50 percent penalty. The spouse however, always has the option of rolling over to avoid this trap.
If you are a non-spouse designated beneficiary and you inherited an IRA from someone who died in 1999 or earlier, but after his RBD, you must withdraw at least the required minimum by year-end, regardless of your age.
Roth IRA beneficiaries
Roth IRA owners and their spouses who roll over are not subject to required distributions, but Roth IRA beneficiaries may be. Even though a beneficiary's required distribution from a Roth IRA is usually income tax-free, it still must be taken, otherwise the 50 percent penalty applies.
If you are a non-spouse designated beneficiary and you inherited a Roth IRA from someone who died in 1999, you should withdraw at least the required minimum by year-end, regardless of your age. If you don't, you'll be stuck with the Five-Year Rule.
If you are a non-spouse designated beneficiary and you inherited a Roth IRA from someone who died in 1998 and you are not using the Five-Year Rule, you must withdraw at least the required minimum by year-end, regardless of your age.
If you inherited the Roth IRA from your spouse and he died before reaching 70-1/2 years old, but you did not roll his Roth IRA over, a distribution would only be required if your spouse would have turned 70-1/2 years old in 2000, had he lived.
If you fit into one of the above groups, you'd better get going! Time is running out for you
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