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What Goes In, Must (Eventually) Come Out
Required Minimum Distributions from a Traditional IRA |
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There is no question that Individual Retirement Accounts (IRAs) are excellent vehicles for building a nest egg for your golden years. In fact, their tax-deferred status allows you to accumulate significantly more assets when compared to a taxable account. To illustrate the power of tax-deferred compounding, consider this hypothetical example. If you contributed $100 per month for 30 years in an IRA with an 8% average annual rate of return, your account would grow to $146,815. However, if you invested the same amount in a taxable account, after 30 years your account would have grown to only $96,196—a difference of over $50,000.
However, all good things must end. Eventually, the funds in a traditional IRA must be distributed. The penalty for not taking a Required Minimum Distribution (RMD) or not taking a large enough RMD may be a 50% excise tax on the amount not distributed as required.
So, when do you have to take an RMD? The requirements for distributing IRA funds differ depending on whether you are the IRA owner or the beneficiary of a decedent's IRA.
For IRA Owners
If you are the owner of a traditional IRA, you must start receiving distributions from your IRA by April 1 of the year following the year in which you reach age 70½. This date is referred to as the required beginning date (RBD). If an IRA owner dies after reaching age 70½, but before April 1 of the next year, no minimum distribution is required because the death occurred before the required beginning date.
For IRA Beneficiaries
If you are the beneficiary of a deceased Traditional IRA holder, you will use a method of distribution that is dependent on whether the IRA holder died before or after his/her RBD. As the beneficiary, you are required to move the funds into your own IRA or an Inherited IRA based on one of the distribution methods described below.
IRA Owner Died Before RBD
Sole spousal beneficiary—Distribution options include:
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Transfer to your own IRA and treat the assets as your own |
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Five-year rule |
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Single life expectancy payments |
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Distribute and roll IRA to your own IRA or a plan |
Nonspouse or spouse is not the sole beneficiary—Distribution options from an Inherited IRA include:
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Five-year rule |
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Single life expectancy payments |
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Spouse may distribute and roll IRA to own IRA or a plan |
Nonindividual—Distribution option from an Inherited IRA:
IRA Owner Died After RBD
Sole spousal beneficiary—Distribution options include:
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Transfer to your own IRA and treat the assets as your own |
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Single life expectancy payments |
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Distribute and roll IRA to your own IRA or a plan |
Nonspouse or spouse is not the sole beneficiary—Distribution options from an Inherited IRA include:
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Single life expectancy payments |
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Spouse may distribute and roll IRA to own IRA or a plan |
Nonindividual—Distribution option from an Inherited IRA:
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Single life expectancy payments |
To set-up your distributions on a systematic basis, you can complete the MainStay Funds IRA/SEP/Roth IRA Distribution Form.
The rules for distributions from Inherited IRAs are lengthy and complex and cannot be fully covered in this brief article. We encourage you to consult with your professional tax advisor for information regarding your personal situation. For more information, including the rules if the beneficiary is the owner's estate, talk to your professional tax advisor. To find out more about how you can put the tax-deferred power of IRAs to work for your financial future, talk to your financial advisor.
You can also find additional information in Publication 590 in the IRS web site http://www.irs.gov.
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