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IRA Distributions

If I don’t need money from my IRA, do I have to take distributions?
September 26, 2016
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Question: If I don’t need money from my IRA, do I have to take distributions?

Answer: Yes, if you are over 70 ½ years old you must take an annual distribution from your retirement accounts. This distribution is called your required minimum distribution (“RMD”). The dollar amount of the RMD is determined by the value of your retirement accounts and your life expectancy as it is determined by the IRS based on your age.  For the most part, you can take the RMD for all the accounts from just one account rather than take from each account.  However, this is not the case for 403(b) accounts.  While you add the 403(b) account balance together with your other accounts to figure out your RMD total for the year, you cannot take the 403(b) RMD from any other account.  Similarly, you cannot take extra from the 403(b) to satisfy the distribution requirements for traditional IRA accounts.

For your retirement accounts that have been growing tax-deferred, the RMD will be counted and taxed as income each year. You must take your first distribution before the April 1 that follows the date on which you turn 70 ½. An additional distribution must be taken before the close of that calendar year. Since a client may be in a position of having two taxable distributions in one year, planning can be done with a financial professional to minimize tax consequences. Penalties for not taking the RMD in a timely manner can be 50% of the RMD amount.  However, the IRS has discretion regarding the imposition of this penalty and can take individual circumstances into account.

In addition to having to take distributions when you are over 70 ½, a Medicaid recipient of any age must take distributions to get protective treatment over the principal of the account.  In Suffolk County, the amount of the distribution is higher than is required by the IRS because of an accelerated life expectancy table.  While the accelerated life expectancy requires the Medicaid recipient to have a higher income, it exempts the full value of the tax-deferred account as a resource.  For example, if you have an IRA with $200,000 that is in proper pay out status according to the county, you can be eligible for long term care Medicaid as long as your other resources are below the Medicaid limit.

Due to the tax-deferred and creditor protected nature of retirement accounts, there is a great deal of planning that can be done to minimize taxes and maximize benefits.