What does your required minimum distribution look like now and after the Stretch IRA is no more?
Those of you who have read by books know that I am a believer in paying taxes later, rather than paying taxes now. Even if you do your best to stick to that game plan, though, you will eventually have to withdraw money from your IRAs and qualified retirement plans because the IRS wants their tax money. This post goes into the nitty gritty details of how those required minimum distributions are calculated, and how you can use the current rules to your advantage.
How do the required minimum distribution rules affect you?
As of this writing, you’re required to begin taking distributions from your IRAs by April 1st of the year following the year that you turn 70½. The IRS won’t let you decide how much you want to take out. In their Publication 590, they spell out the rules, provide factors that you have to use, and let you know how much it will cost you in penalties if you don’t do the math right. There are three tables that they have created that contain the factors you have to use. The most popular is Table III, which is for unmarried individuals and married individuals whose spouses are not more than 10 years younger. Table II is for IRA owners who have spouses who are 10 or more years younger, and Table I is for beneficiaries of IRAs. The factors in those tables are based on an average life expectancy and have nothing to do with your own health and life expectancy. So when you turn 70 ½, you have to look up the factor that you must use, divide it into your IRA balance as of December 31st, and that will give you the required minimum distribution you must take by April 1st.
These required minimum distributions can cause huge problems for retired people because they can increase your tax bracket, cause more of your Social Security to be taxed, and even make your Medicare premiums go up. And while you can’t generally avoid them while you’re living (unless you continue to work), you can use the rules to your advantage to minimize the tax bite that your surviving spouse and children will have to pay. Under the current rules, your children are allowed to take only the required minimum distributions from your IRA after your death. The good news is that, since they have a longer life expectancy, their required minimum distributions will be lower. Keeping more money inside the tax shelter of the IRA for a longer period of time is what the Stretch IRA is all about.
If you’ve always been the kind of person who enjoys numbers, then you may find this short video interesting. It walks you through required minimum distribution calculations for your own IRA or retirement plan, as well as the calculations your beneficiaries will use after your death. It also discusses the tax implications of those distributions. The Senate Finance Committee, though, has voted 26-0 to eliminate the Stretch IRA for most beneficiaries. When it is enacted into law, your children will have to withdraw your IRA and pay tax on it within five years. Even your Roth IRAs aren’t safe – your children will have to withdraw the entire Roth account within five years of your death. And even though withdrawals from Roth accounts aren’t taxable, the greater loss is that the future growth on your IRA money will no longer be tax-free.
This is big news, and I want to make sure that you stay informed about the latest developments. Please stop back soon!