What are Required Minimum Distributions?
Tax law requires traditional IRA holders to begin withdrawing minimum amounts, known as Required Minimum Distributions ("RMDs"), from their accounts once they reach age 70½. Technically, the IRA money must start coming out in specific increments no later than April 1st following the year that an individual reaches 70½. The exact distribution amount changes from year to year. Below are some frequently asked questions regarding RMDs.
How are RMDs calculated?
They are calculated by dividing the balance of your traditional IRA accounts on December 31st of the prior year by your life expectancy, a factor that has been determined by the Internal Revenue Service.
What if an IRA holder is 70½, but does not need the RMD and therefore does not take it?
If the IRA owner fails to withdraw the full amount of the RMD by the deadline of April 1st., the full amount of the RMD is taxed and a penalty of 50% levied.
What happens if a traditional IRA holder dies before the RMDs have begun?
When a traditional IRA owner dies before RMDs have begun, the entire amount of the owner's benefit must (generally) be distributed to the beneficiary (who is an individual) either: (1) within 5 years of the owner's death; or (2) over the life of the beneficiary starting no later than one year following the owner's death. The IRA becomes an Inherited IRA for the benefit of the beneficiary. All income from the IRA to the beneficiary is taxable.
If an IRA owner does not need RMDs to maintain his or her lifestyle and intends to hand down the IRA to a spouse (or to future generations), can he or she find a way to use the RMDs to leverage a tax-free inheritance for heirs?
Absolutely. Contact AP&G Financial to learn the most efficient way to accomplish this goal. AP&G will integrate it into your retirement plan.
What are the benefits of converting my traditional IRA to a Roth IRA?
1. Withdrawals from a Roth IRA are tax-free. You are not required to take Required Minimum Distributions ("RMDs") at age 70½. This can provide years of TAX-FREE growth far beyond your traditional IRA.
2. Withdrawals from a Roth IRA are not incuded in the calculation for the taxation on Social Security benefits.
3. Effective January 1, 2010 anyone, regardless of income, can convert a fully-taxable traditional IRA to a TAX-FREE Roth IRA.
What are the tax ramifications imposed on the conversion to a Roth?.
You will have to pay income taxes on every dollar you convert from a traditional IRA to a Roth IRA. However, if you employ certain strategies, the taxes due on what you are able to convert to a Roth IRA can be paid by your IRA custodian. Converting to a Roth in one year gives you until October of the following year to decide whether to undo the conversion. If you are receiving RMDs, then you must take the withdrawal prior to converting your traditional IRA to a Roth IRA. Tax will be due on the distibution.