Tips For Cutting Taxes On IRA RMDs

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You can ignore it if you want, but sooner or later the dreaded RMD is coming to get you -- and your tax dollars. So young or old, you might as well review some key points.

Rules for required minimum distributions (RMDs) apply to owners of traditional IRAs and to those who inherit them and Roth IRAs. Whether you are 20 or 70, certain retirement strategies let you avoid costly missteps.

For IRA owners , RMDs start after age 70-1/2. One day's difference can mean a year's tax deferral.

Say a hypothetical Ed Bass was born on June 30, 1943. He will be 70-1/2 in December 2013. Ed must start RMDs by April 1 of the following year: 2014.

If Ed's pal Dan Lee was born on July 1, 1943, he won't be 70-1/2 until 2014. So Dan doesn't have to start RMDs until April 1, 2015.

You can take more than the RMD if you want. But any shortfall draws a 50% penalty. To calculate the RMD, use the IRS uniform lifetime table. If your IRA beneficiary is your spouse who is more than 10 years younger, use the joint-life-and-last-survivor expectancy table. That leads to a smaller RMD.

Your IRA custodian will calculate the RMD each year or on request.

Let's go back to Ed Bass. He must take an RMD by next April. That's his 2013 RMD, based on his year-end 2012 balance. Say that amount was $100,000.

In 2013, Bass had his 70th birthday. The uniform lifetime table shows that at age 70 Bass has an expected life span of 27.4 years. Dividing $100,000 by 27.4, Bass must withdraw at least $3,650 by next April to avoid a 50% penalty.

After the first April deadline, future RMDs must be taken by each Dec. 31. So Bass must take a second RMD, using his 2013 year-end balance and his age-71 life expectancy, by Dec. 31, 2014.

On this schedule, Bass takes two RMDs in 2014. If he fears this will push him into a higher tax bracket, he can take his 2012 RMD in 2013 instead of waiting until next April.

Inherited IRAs

IRA beneficiaries have different RMD rules. Spouses can roll over the account to their own name and act as an IRA owner.

Nonspouse beneficiaries who want to take RMDs typically start by Dec. 31 of the year after death.

Say Ann Coe inherited an IRA from her mother, who died in 2012. Coe must start RMDs by Dec. 31, 2013. If Coe is 35 in 2013, her life expectancy is 48.5 on the single life table. She divides 48.5 into the IRA's balance on Dec. 31, 2012.

If the balance was $120,000, Coe's 2013 RMD is $2,474. Going forward, Coe's RMDs will be the succeeding year-end IRA balances divided by 47.5, 46.5 and so on.

Roth IRA owners don't have RMDs. But Roth IRA beneficiaries do, and they follow the above rules.

Distributions from inherited Roth IRAs usually are tax-free. But the 50% fine applies to skipped RMDs.

You can aggregate some RMDs. If you have an $8,000 RMD from one IRA this year and a $7,000 RMD from another, you can take $15,000 from either or both of them.

But you can't count part of your withdrawal as your spouse's RMD. "Each IRA owner must take his or her own RMD yearly," said IRA expert Ed Slott. If one spouse withdraws an amount equal to their combined RMDs, for instance, the other spouse will owe a 50% a penalty for any RMD not taken from his or own account.

RMDs from an IRA inherited from one decedent can't be combined with any other RMDs. And Roth and traditional IRA RMDs can't be aggregated.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Mutual Funds

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