IRA distribution at age 70.5

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IRA distribution at age 70.5

Postby JAF » Fri Dec 14, 2012 11:48 am

I will be 70 in Jan. 2013 and would like to know when I need to start redeeming my IRA funds. Do I wait until June when I will be 70.5 or can I begin in Jan? Help with this matter will be appreciated.
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Re: IRA distribution at age 70.5

Postby MarkNYC » Fri Dec 14, 2012 2:03 pm

Since you turn 70.5 during 2013, 2013 is your first required distribution year. You can take the 2013 Required Minimum Distribution anytime during calendar year 2013, or during 2014 no later than April 1, 2014. Waiting to take the 2013 distribution in 2014 means you will have to take both 2013 and 2014 Minimum Distributions in the same year, which may or may not be advisable, depending on your tax situation.
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Re: IRA distribution at age 70.5

Postby minnesotamoney » Fri Dec 14, 2012 2:04 pm

JAF:

RMDs are required to begin the calendar/tax year in which a person turns 70 1/2. Sounds as if January fits into that year. So, January 2013 is just fine, if that's when you wish to take your first distribution. Regulations give you up until April 1 of the calendar year AFTER (meaning 2014) the year in which you turn 70 1/2 (2013) to make that FIRST distribution.

But for the second year of distributions and for all those following, you must complete your annual distribution by Dec. 31 of that year. If you do wait until April 1 of 2014, then you will have two (2) RMDs recorded as income on your 2014 tax return, and that could possibly result in additional tax liability if those TWO withdrawals bump you up into a higher tax bracket in 2014 or if doing so makes more of your Social Security income taxable.
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Re: IRA distribution at age 70.5

Postby sscritic » Fri Dec 14, 2012 2:11 pm

minnesotamoney wrote:If you do wait until April 1 of 2014, then you will have two (2) RMDs recorded as income on your 2014 tax return, and that could possibly result in additional tax liability if those TWO withdrawals bump you up into a higher tax bracket in 2014 or if doing so makes more of your Social Security income taxable.

Or require you to pay IRMAA (or more IRMAA) on your Medicare Part B and Part D in 2016.
[Income Related Monthly Adjustment Amount, based on MAGI from two years before, e.g, 2013 premiums are based on your 2011 tax return.]
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Re: IRA distribution at age 70.5

Postby Alan S. » Fri Dec 14, 2012 3:05 pm

You can elect to defer any portion of the first CY RMD to the second CY no later than 4/1. Occasionally, the most effective decision could be to take part of the first RMD and defer the rest. It's not a requirement to either take the entire first year RMD in that year or defer the entire RMD to the second year.

The IRS RMD Regs of 2002 actually simplified the account value determination. Previously, you had to adjust the year end balance if you deferred the first year RMD to reflect what it would have been had that RMD been taken in the first year. Since 2002, there is no adjustment to be made which is simpler. However, if you defer the first RMD it will now make the second RMD larger since you will use actual unadjusted year end IRA values to determine the second RMD.

Example: The first RMD distribution year RMD is either 3.65% or 3.77% of the prior year end balance. If that RMD is deferred, the year end balance for the first year will around 3.7% higher than it would have been and therefore the second year RMD will be 3.7% more.

You also need to know that starting 1/1 of your first RMD distribution year, the FIRST distribution taken is applied to the RMD. Because of that any ROth conversions you wish to do can only be done AFTER the RMD has been completely satisfied. That may mean either postponing your conversion to later in the year of moving up your RMD distribution should you want to convert early in the year. It also means that those who wish to do a Qualified Charitable Distribution (QCD) must not take any distribution before the QCD if they want the QCD to cover their RMDs. Delinquent Congressional action on this holds you hostage all year long and if this provision is made retroactive for 2012 at year end, it will be the third time this has occurred.
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Re: IRA distribution at age 70.5

Postby Levett » Fri Dec 14, 2012 3:17 pm

JAF--

Mark wrote the following: "You can take the 2013 Required Minimum Distribution anytime during calendar year 2013."

Based on my experience, I would say it depends on the vendor.

Here's my experience with Vanguard. I was 70.5 last June (2012) and asked Vanguard to schedule my first RMD for mid-January 2012. Vanguard said, as a matter of its own policy, that it would not schedule my first RMD before June of 2012. Thus, in June of 2012 I received my first RMD. My 2013 payment can be scheduled for any date of my choice.

Interestingly, another vendor--TIAA- was happy to oblige my request for a January 2012 payment even though I would not be 70.5 until June of 2012.

So, my advice is to check your vendor's (or multiple vendors) policy (policies).

Lev
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Re: IRA distribution at age 70.5

Postby Alan S. » Fri Dec 14, 2012 3:52 pm

lev,
You must have contacted a poorly trained VG Rep. There should never be a custodian based restriction on a customer's IRA distributions (there might be for a particular investment). Since the first distribution in an RMD year (2012 for you) is deemed to be the RMD, what the rep indicated means that a person in your situation but that turned 70.5 in December could not take any distribution whatsoever from the IRA all year until December even if they needed the money. ??

An IRA owner should be able to take distributions anytime they wish, irrespective of whether those distributions are RMDs or not. RMDs can be aggregated between any IRAs owned by the taxpayer and it not the responsibility of an IRA custodian to earmark any distributions as RMDs or not. They report them all the same way on the 1099R.

Their IRS mandated responsibility is only to report to the taxpayer that they have an RMD requirement for a particular year and either calculate the RMD amount for that particular IRA or offer to calculate it. They have no authority to either force someone to take an RMD or restrict access to their funds before a certain date.

If you did not need this money, probably no harm done though. I don't think this is Vanguard's policy, but they may need to beef up their training.
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Re: IRA distribution at age 70.5

Postby dickenjb » Fri Dec 14, 2012 5:12 pm

Lev may also be referring to the optional automatic calculation and distribution of RMD's (Vanguard's "RMD Service").

Of course one can do a manual distribution of funds from a Vanguard IRA at any time. Even before age 59.5 if one chooses.
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Re: IRA distribution at age 70.5

Postby Calm Man » Fri Dec 14, 2012 7:38 pm

Although I"m aways away, let's say you take an RMD and do a ROTH conversion in the same year at Vanguard and that the RMD is correct. Further, let's say you are very careful to do the RMD first and then later the ROTH conversion. Looking at the 1040 page 1, on one of the lines there is a line for IRA distributions with a space for the distribution amount and the one that counts for the taxable amount. Does IRS care if you convert to a ROTH or just take the cash and/or does Vanguard report these separately?
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Re: IRA distribution at age 70.5

Postby Alan S. » Fri Dec 14, 2012 7:56 pm

Vanguard and other IRA custodians report a Roth conversion identical to a TIRA distribution. The RMD is also reported the same as any other TIRA distribution.

That means that if you take your RMD and then convert an additional amount, you will just get a single 1099R reporting the total. You put the total on line 15a and 15b because both are taxable.
On the other end of the conversion, the Roth custodian will issue a 5498 reporting receipt of a conversion amount, and the conversion portion is also reported on Form 8606 with the result going to the line 15b total on Form 1040.

If you instead kept the cash for both distributions, there would be no conversion on Form 8606 and no 5498, but your taxable amount would be the same.
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Re: IRA distribution at age 70.5

Postby Calm Man » Fri Dec 14, 2012 9:42 pm

Alan S. wrote:Vanguard and other IRA custodians report a Roth conversion identical to a TIRA distribution. The RMD is also reported the same as any other TIRA distribution.

That means that if you take your RMD and then convert an additional amount, you will just get a single 1099R reporting the total. You put the total on line 15a and 15b because both are taxable.
On the other end of the conversion, the Roth custodian will issue a 5498 reporting receipt of a conversion amount, and the conversion portion is also reported on Form 8606 with the result going to the line 15b total on Form 1040.

If you instead kept the cash for both distributions, there would be no conversion on Form 8606 and no 5498, but your taxable amount would be the same.


Alan 15b says "taxable amount of IRA distribution". As you indicate, you know that from the 1099? As I recall I often get the forms like 5498 and 8606 months later than the 1099s as I file for my parents, and they don't affect tax reporting, right? (These are the few forms that I never care about, right?)
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Re: IRA distribution at age 70.5

Postby Epsilon Delta » Fri Dec 14, 2012 10:02 pm

Calm Man wrote:
Alan 15b says "taxable amount of IRA distribution". As you indicate, you know that from the 1099? As I recall I often get the forms like 5498 and 8606 months later than the 1099s as I file for my parents, and they don't affect tax reporting, right? (These are the few forms that I never care about, right?)


You don't get a 8606, if needed you fill it in and file it.

You get the 5498 after the April 15th deadline to fund IRAs. It shows any contributions for the previous year, which is why you get it in the summer instead of in January. The 5498 also gives the value of the account on Dec 31st, which is useful if you need to make an RMD.
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Re: IRA distribution at age 70.5

Postby Alan S. » Fri Dec 14, 2012 10:09 pm

You should care about all the forms because if they do not conform to what you reported on your tax return, you have a good chance of hearing from the IRS, in some cases sooner and in other cases down the road after the problem has snowballed.

Your reportable distributions show on a 1099R but in many cases you have to calculate the taxable amount. When you have basis on a Form 8606, you also use that form to calculate how much of the 1099R figure is taxable. That's for IRA accounts. For qualified plans, the plan will break out the taxable amount and show it in Box 2a.
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Re: IRA distribution at age 70.5

Postby sscritic » Fri Dec 14, 2012 11:56 pm

Alan S. wrote: For qualified plans, the plan will break out the taxable amount and show it in Box 2a.

Thank goodness. 35 years ago, our contribution to CalPERS were post tax; that changed a few years later (tax law?). My 2011 1099-R told me that 158.88 was not taxable. I am glad I didn't have to calculate that for myself.

Actually, it isn't THAT hard:
CalPERS uses the Simplified Safe Harbor Method tables in Internal Revenue Service (IRS) Publication 575, to determine the tax-free portion of your allowance. For retirements effective on or after January 1, 1998, use one of the following tables to determine the number of your lifetime payments. Divide the amount of your “Taxed Contributions” by the “Number of Lifetime Payments” to get your monthly tax-free allowance amount.

My table (joint life):
Code: Select all
Combined Ages     Number of
of Annuitants     Lifetime Payments
at Retirement
110 or less           410
111-120               360
121-130               310
131-140               260
141 or more           210


I checked one year, and they were doing it right, so I haven't bothered to check them again. Actually, I haven't checked since the divorce and the division of the pension. Should I use the single life table now? Since all my post-tax contributions were before the marriage, do I get all of them? I guess I could ask my ex if all of her pension is taxable. Ah, the mysteries of life and tax law.
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Re: IRA distribution at age 70.5

Postby sscritic » Sat Dec 15, 2012 2:00 am

My questions for myself were not well thought out. Since the divisor is constant, the numbers never change, so right one year, right every year.* And yes, by looking at 1099-Rs from before and after the divorce, it is clear that my ex got a share of my basis.

*until the basis is recovered after 30 years with a divisor of 360
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