Plan for Your Required Minimum Distributions

Are you ready to begin taking required minimum distributions from your traditional IRA this year? Here are three facts to plan for.

  • Required withdrawals. The rule is this: To avoid a penalty, you’re required to take a minimum amount from your traditional IRA once you reach age 70½. You determine the dollar figure by dividing the balance in your account at the end of last year by the life expectancy for your age per IRS tables.As long as you meet your minimum required withdrawal, you’re free to take any additional amounts from your IRA. Just remember the excess does not count toward next year’s required minimum distribution — and that IRA withdrawals are taxable income in the year you receive the money.
  • The tax effect. IRA withdrawals are treated as ordinary income, so you’ll pay tax at your regular federal income tax rate. That’s true even if the amount you withdraw includes what usually would be treated as capital gain, such as when you sell appreciated stock held inside your IRA in order to provide the cash to make your withdrawal.
  • Your basis. Nondeductible contributions to your traditional IRA, as well as certain rollover contributions, are considered basis. Those amounts are not taxed when you take withdrawals. However, you can’t simply withdraw the nontaxable portion of your IRA. Instead, part of each withdrawal will be taxable and part will be nontaxable. Use “Form 8606, Nondeductible IRAs,” to calculate and report your basis and the taxable portion of your current withdrawal.

Give us a call and let us help you plan for distributions from your IRA. We’ll be happy to answer your questions and explain the rules.