They’re coming your way — required minimum distributions, that is, if 2013 is the year you’ll reach age 70½ and you own certain retirement accounts, such as a traditional IRA.
You may be familiar with RMDs, which are the minimum amount you must withdraw from your traditional IRA each year. For example, you might know RMDs are calculated by dividing the balance in your account at the previous December 31 by a life expectancy based on your age. If you have more than one IRA, each is calculated separately, though you can take the distribution from any account, or multiple accounts. There’s also a 50% penalty for failing to take an RMD.
Other rules are less well known, such as the one involving Roth conversions. The amount you’re required to take from your traditional IRA is not eligible for conversion to your Roth. Instead, you withdraw your RMD and convert the remainder of the account. If you forget, you’ve made an excess contribution to your Roth. You can withdraw the extra before October 15 of the year after the conversion. If you leave it in the Roth, you may have to pay a 6% penalty tax.
A different situation arises when you make a charitable contribution from your traditional IRA. In that case, the amount you donate is part of your RMD. Unlike regular RMDs, when the distribution is made directly to the charity, the income you report on your federal return is not affected.
Other rules apply to inherited IRAs, and marriage or divorce may change the amount you’re required to withdraw from your account each year. Please contact us for details and planning suggestions.