When IRA distributions are required

(MoneyWatch)People who own retirement accounts and are age 70 and older need to know that their retirement accounts are subject to special minimum distribution requirements. The Internal Revenue Code prescribes the requirements individuals must follow in regards to taking payments from their accounts in retirement plans and traditional, deductible individual retirement accounts (IRAs). Amounts owned in Roth type IRAs are not subject to these rules.

These requirements specify when the distributions must commence, the payout period required, and the rate of distribution. These rules affect both lifetime and post-death distributions.

Generally, individuals must commence distributions from their IRAs no later than April 1st of the year following the year they turn age 70 1/2.

The minimum amount that must be distributed each year is calculated by using a factor from the Uniform Lifetime Table which is specified in IRS Publication 590.

Generally the account value as of the most recent year-end is divided by the factor from the table that coincides with the current age of the individual. For example, the factor for individuals age 70 is 27.4. So, if you are age 70 in 2013, and have an IRA that had a value of $100,000 on December 31st 2012, the minimum amount you must withdraw from the IRA as your first annual required distribution would be $3,650.

These rules for accounts held in an employer's retirement plan are a little different. Folks with retirement plan accounts, such as 401(k) or 403(b) accounts, who are not a five percent owners of the business that maintains the plan (a "five percent owner"), can start receiving distributions no later than April 1st following the year in which he attains the age 70 1/2 OR retires, whichever is LATER. This date is referred to as the required beginning date, or RBD. This special rule allows folks who continue to work to put off distributions from their employers retirement plans.

The first time that the minimum distribution is required is known as the first distribution calendar year, and must be made by April 1st of the year following the year the participant attains the age of 70 1/2. Subsequent distributions  must be made by December 31 of each calendar year.

The RBD for traditional, deductible IRAs (not Roth IRAs) and 5 percent owners participating in an employer's retirement plan is April 1st following the year in which someone attains the age 70 1/2, even if the person has not yet retired.

Financial firms who serve as IRA trustees, custodians, and issuers are required to report to the IRS annually the amount of the minimum required distribution for the year it is required. So don't think you can fly under the radar, not take a distribution and have it go unnoticed by the IRS. If you do not follow these requirements it can cost you; failure to comply with the mandatory distribution amount and date requirements may result in the imposition of a hefty 50-percent excise tax on late or insufficient distributions.

If you have multiple IRAs, a minimum required distribution must be calculated separately for each IRA. However, these amounts may then be totaled and the total distribution taken from any one or more of the IRAs.

If you have a more than one account in an employer's retirement plan, you must calculate and withdraw a minimum required distribution from each plan. Aggregation is not permitted

Distributions from IRAs may not be aggregated with distributions from 401(k) and 403(b) accounts. Also, amounts in IRAs that an individual holds as beneficiary of the same decedent may be aggregated, but such amounts may not be aggregated with amounts held in IRAs that the individual holds as the IRA owner or beneficiary of another decedent.

Check back later this week when I'll write about a few smart move people can make to plan for these required distributions.

  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.

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