In my previous entry I discussed contributing to the different types of IRAs. Once you hit the appropriate age you will need to make a distribution from your IRA. You might need to withdraw earlier but it all depends on your situation. There are many factors involved with IRA distributions so let us dive in shall we?

IRA owners generally must include traditional IRA distributions in their taxable gross income. There are, however, some exceptions to the rule: rollovers (if done properly), transfers, recharacterization, removal of excess contributions, revocation of regular/spousal/catch up contributions, distribution of basis (nondeductible traditional IRA contributions and after-tax rollover contributions). Taxable traditional IRA distributions taken before age 59 ½ are generally subject to an additional 10 percent early distribution tax, this is to encourage you not to take an early distribution if you can help it. This early distribution tax is paid when the persona taking out the early distribution files their federal tax return. The penalty tax does not apply, however in special circumstances such as age 59 1/1, death, disability, certain medical expenses, IRS levy, and qualified reservist distributions.  There are also waivers for the penalty tax in instances of taking qualified hurricane distributions provided by the disaster tax relief and other provisions provided during qualified natural disasters.

A Roth IRA qualified distribution may be taken tax and penalty free as long as: there is a 5-year waiting period, the owner is 59 ½, death, disability, or is a first-time home buyer. If these criteria aren’t met it is a non-qualified distribution. Roth IRAs are distributed in the following order: annual contributions, conversion and retirement plan rollover assets (by year), and earnings. These can also get the same penalty tax waivers as a traditional IRA. Both types of IRAs are subject to federal tax withholding up to 10 percent of the distribution unless the IRA owner elects the IRA owner elects not to have income tax withheld or have more than 10 percent of income tax withheld.

Traditional IRAs are subject to required minimum distributions (RMD) that means when you turn 70 ½ you must take a certain amount of funds from your IRA. Typically, these must be taken out by April 1^st of the following year they become 70 ½ this the required beginning date (RBD), all required RMDs must be taken out by December 31^st. You can also donate $100,000 of your IRA funds tax free to charity if you’re age 70 1/2 , these go directly to charity and are reported to the IRA owner to claim on their taxes. An RMD is calculated by the balance of the IRA and the distribution period. The distribution period is calculated by a number using the IRS life expectancy table. If you fail to take your RMD you will be subject to an excess accumulation tax equal to 50% of the amount that was needed to be taken out. for the sake of simplicity i’ve included a copy of the life expectancy table here.

When an IRA owner dies their beneficiaries are entitled to the remaining balance of the IRA. IF there are no beneficiaries, the owner’s estate Is generally entitled to the funds but in some cases the funds will just defer to the living spouse based on documentation. The IRA plan will specify how assets will be paid out when a beneficiary is names. Beneficiaries should also provide copies of the owner’s death certificate to the financial organization where the IRA is housed. Once obtain. need and all beneficiaries have been verified, funds can be distributed amongst the beneficiaries. If there is more than one beneficiary, the funds will be split reasonably between all beneficiaries. Depending on when the owner dies, distribution of funds for beneficiaries can get tricky in such events like the owner dying before the required beginning date. The IRS has developed a table for traditional IRA beneficiary options including default life expectancy payments if a beneficiary isn’t named by December 31^st of that year. I have made this available for your viewing pleasure here

The beneficiary may take out distributions of any amount as long as the entire amount is withdrawn December 31^st of the year containing the owners 5^th anniversary of their death. Beneficiaries can also have life expectancy payments payed out starting December 31^st of the year following the year of the IRA owner’s death based on the life expectancy of the beneficiary. As a beneficiary you can also move your deceased spouse’s IRA into your own through a direct transfer and distribute at any time or roll it over into their IRA, minus their RMD due for that year. You can also have a non-person beneficiary such as an estate or a trust if it is qualified and valid with identifiable beneficiaries listed. The same rules apply for Roth IRAs as well.

We’re reaching the end of my series on IRAs. I hope that the journey so far has been enjoyable. I also hope that I made these fun retirement assets as easy to understand and that you might even be considering getting yourself an IRA if you don’t already have one. Tune in next time for my next entry my friends. Invest wisely, ciao!