IRA Withdrawal Question
This might seem trite, but what if one has an Inherited IRA for which they have to take a RMD each year. In this case, the 2007 distribution is based on the balance on 12/31/06, divided by a value from a tax table reduced by one.
My question is this. What if one invests this IRA poorly in one year and the value of the IRA drops significantly. There might be less in the IRA than the RMD. Is all of the IRA required to be withdrawn? Is this when the value of the IRA drops to zero and closes? Would taxes have to be paid on the value of the IRA on December 31st of the previous year divided by a value from a tax table reduced by one, or on the value actually withdrawn?
This is currently a hypothetical case (I haven’t gotten the Inherited IRA yet), but I imagine it could be the case one day for any IRA portfolio that is not “all cash”. Thanks!
Permalink Submitted by [email protected] on Mon, 2007-08-27 01:36
You are correct. Remedy: change investments. Even CDs don’t do that poorly.
Permalink Submitted by Alan Spross on Mon, 2007-08-27 16:44
You are only taxed on the value actually distributed. not the prior 12/31 value. The IRA account terminates when it no longer hold assets because of distributions, whether RMD or otherwise. But if your IRA holds investments that are depressed in value when you have to take a distribution, in many cases you can take the distribution “in kind” if you choose.
Permalink Submitted by Bryan Schuck on Tue, 2007-08-28 01:01
afry: I agree. This is a hypothetical situation. I was thinking what might have to happen if one did their asset allocation poorly. I’m working with some beneficiaries (my siblings) that might not be too investment savvy. Thanks.
alan: Thanks, also. It is an interesting option, that one can take a distribution “in kind”. You mention that this can be done “in many cases”. Is the constraint a function of tax code, or is it a function of what a custodian will allow, or some other thing.
Thanks again.
Bryan
Permalink Submitted by Alan Spross on Tue, 2007-08-28 02:21
Bryan,
It is a function of the type of investment for which the custodians maintain a market. Publicly traded securities should not present a problem, but certain proprietary investments may. I doubt if bank CDs can be transferred out of the bank IRA into a taxable account. This has nothing to do with the tax code.