Do I HAVE to Take Distributions From My Traditional IRA?
By Beverly DeVeny and Jeffrey Levine
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This week’s Slott Report Mailbag, proudly sponsored by GoldCo Precious Metals, includes questions on some key IRA principles – taking IRA distributions, handling an inherited IRA as a non-spouse beneficiary and navigating required minimum distributions (RMDs). As always, we recommend that you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.
1. Do I have to take distributions from my tradtional IRA?
Answer:
Yes. An IRA, SEP or SIMPLE owner must begin taking distributions in the year they turn age 70 ½. It does not matter if you are still working or if you do not want to touch the money, you still must take a required distribution. Your IRA custodian is required to notify IRS that you have to take a distribution but they are not required to tell IRS how much you should withdraw. The custodian is required to tell you how much you should withdraw or they must offer to do the calculation for you. You will get that letter from your IRA custodian in January each year.
A non-spouse IRA beneficiary who is named on the beneficiary form (not one who inherits through the estate) must generally begin taking distributions in the year after the IRA owner’s death although some beneficiaries may have only 5 years to distribute the entire IRA. A spouse beneficiary (one who does not move the IRA funds into an IRA in their own name) does not have to start taking distributions until the IRA owner would have been 70 ½. However, an IRA custodian can limit the distribution options for a beneficiary. You should check the IRA agreement for each account you inherit to see what your distribution options are for that account. A non-person beneficiary (estate, charity, etc.) and a trust beneficiary have special distribution rules. See IRS Publication 590 or the IRA account agreement form for more information on the distribution rules for beneficiaries.
Any required distribution that is not taken is subject to a 50% penalty of the amount not taken and is reported on Form 5498 for the year the distribution was missed.
2.
I just inherited an IRA from someone who is not my spouse. What do I do now?
Answer:
You will have to check with the IRA custodian to see what your options are under each IRA account you have inherited. Custodians can limit your options.
Under the tax code, any living beneficiary that is named on the beneficiary form can stretch distributions over their life expectancy. In order to do this you must first establish a properly titled inherited IRA. The title MUST include the name of the decedent. For example: John Smith, deceased, IRA for the benefit of Mary Jones. Then the funds are transferred, ONLY as a trustee-to-trustee transfer, to the inherited account. Any distribution that is payable to you will be taxable and will not be eligible to go into any IRA account.
You should than name your own successor beneficiaries, if the IRA custodian allows this, and you will have required distributions beginning in the year after the account owner’s death. Any required distributions that are missed will be subject to the 50% penalty and are reported by the beneficiary on Form 5498 for the year the distribution was missed.
3.
Do I have to take required minimum distributions from every retirement account that I have?
Answer:
Generally, yes. There is an exception for IRA accounts. You can calculate your distribution from each account that you have and then combine the distributions from all like accounts and take the distribution from one or any combination of those like accounts that you have. Like accounts are all accounts you own or all accounts inherited from the same person. Roth IRAs are considered their own separate category of IRA. The same exception exists for 403(b) accounts.
Under no circumstances can you take an IRA distribution from an account other than an IRA, a Roth distribution from an account other than a Roth, or an employer plan distribution from any other plan you might have.
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This week’s Slott Report Mailbag is sponsored by:
GoldCo Precious Metals
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