No Joke This April Fool’s Day – Older Clients May Need to Take Distributions from IRA Accounts

If you or someone you know own IRAs or qualified plan accounts and reached the age of 70 ½ in 2012, April 1 is no April Fool’s Day.  It is a critical deadline.  April 1 is the day these individuals must begin taking required minimum distributions (RMDs) from traditional IRAs.

Here are some important items to note:

  • Taxpayers attained age 70 1/2 in 2012 if they were born after June 30, 1941, and before July 1, 1942.
  • Participants in a qualified retirement plan, for example, a 401(k) plan, must begin taking distributions by April 1 of the calendar year following the later of the year in which they either reach age 70 1/2 or retire.
  • The exception to that is for 5% owners, who are subject to the same rules as IRA owners.
  • However, a qualified plan may provide that the required beginning date for all employees (including non-5% owners) is April 1 of the calendar year following the calendar year in which the employee attains age 70 1/2.
  • Lifetime distributions need not be taken from Roth IRAs at any age.
  • Individuals who are 70 1/2 or older may exclude from gross income up to $100,000 that is paid from their IRAs to a charitable organization in any tax year after Dec. 31, 2005, and before Jan. 1, 2014. Such qualified charitable distributions (QCDs) originally didn’t apply to distributions made after Dec. 31, 2011, but were extended through 2013 by the 2012 Taxpayer Relief Act.
  • The April 1 required beginning date (RBD) is critical because failure to begin RMDs could expose taxpayers to a penalty tax equal to 50% of the difference between the amount that should have been withdrawn and the amount that was withdrawn.
  • Taking the RMD in the year the taxpayer turns 70 1/2, instead of waiting until April 1 of the following year, may make sense so you don’t “double up” on year 2’s distributions and push your income into a higher tax bracket that year.

To understand the amount of your RMD, your tax exposure, and other information critical to your accounts, please contact your Anders tax advisor.