Don’t Forget Your Minimum Required Distribution for 2011
The IRS does not allow IRA owners to keep funds in a Traditional IRA indefinitely. Eventually, assets must be distributed and taxes paid. If there are no distributions, or if the distributions are not large enough, the IRA owner may have to pay a 50% penalty on the amount not distributed as required. Generally, required distributions begin in the year the IRA owner attains the age of 70½.
IRA owners must take at least a minimum amount from their IRA each year; starting with the year they reach age 70½. A taxpayer who fails to take a distribution in the year age 70½ is reached can avoid a penalty by taking that distribution no later than April 1st of the following year. However, that means the IRA owner must take two distributions in the following year, one for the year in which age 70½ is attained and one for the current year.
For purposes of determining the minimum distribution, all Traditional IRA accounts, including SEP-IRAs, owned by an individual must be taken into consideration. The required minimum distribution must be determined separately for each account. However, the amounts can be totaled and the distribution can be taken from just one of the accounts or any combination of the accounts. If the owner chooses not to take the minimum distribution from each account, it is not uncommon for IRA trustees to require written certification that the owner took the minimum distribution from other accounts.
The minimum amount that must be withdrawn in a particular year is the value of the IRA account at the end of the business day on December 31st of the prior year, divided by the number of years the IRA owner is expected to live based on the IRS life expectancy tables using the taxpayer’s oldest attained age for the year.
The minimum distribution computation determines the amount that must be withdrawn during the calendar year. The distributions can be taken all at once, sporadically or in a series of installments (monthly, quarterly, etc.), as long as the total distributions for the year are at least the minimum required amount. Amounts that must be distributed (required distributions) during a particular year are not eligible for rollover treatment.
There is no maximum limit on distributions from a Traditional IRA and as much can be withdrawn as the owner wishes. However, if more than the required distribution is taken in a particular year, the excess cannot be applied toward the minimum required amounts for future years.
Distributions that are less than the required minimum distribution for the year are subject to a 50% excise tax (excess accumulation penalty) for that year on the amount not distributed as required. If the failure to withdraw the minimum amount or part of the minimum amount was due to reasonable error, and the owner has taken, or is taking, steps to remedy the insufficient distribution, the owner can request that the penalty be excused by completing applicable sections of Form 5329 and attaching an explanation. IRS will then determine if the penalty will be waived.
If the IRA owner dies on or after the required distribution beginning date, a distribution must be made in the year of death, as if the IRA owner had lived the entire year. If the distribution is after the owner’s death, the minimum amount must be distributed to a beneficiary.
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