The RMD is back and is required for 2010 and all future years. Taxpayers over age 70½ must take a required minimum distribution from their IRA's and other qualified retirement plans. For 2009, the government removed the requirement for one year.
Taxpayers can take distributions from their IRA's after they turn 59½ without incurring the 10% premature distribution penalty. There are some limited exceptions to taking distributions from a qualified plan before age 59½ as follows:
- Paid as a result of death or disability
- Being age 55 or older and leaving your job
- Distributions paid as a result of a divorce decree or separation agreement
- Taking a series of "substantial economic payments" over your lifetime
- For medical expenses if they exceed 7.5% of adjusted gross income
In addition to the exceptions listed above, these are the exceptions for distributions from an IRA before age 59½:
- New home buyer, but limited to $10,000
- College expenses for taxpayers and their dependents
- People who are unemployed and pay for their own health insurance
Taxpayers, however, must begin to take distributions from their IRA's before April 1 following the year they turn 70½. However, be cautious. If you wait until April 1 of the following year you turn 70½, you will be required to take two distributions that year. This may cause you to be in a higher tax bracket.
To calculate the RMD, consult IRS Publication 590, Appendix C. Most people will use the "Uniform Life Table." The "Joint Life Expectancy Table" is used by a married couple where the spouse is at least 10 years younger than the spouse taking the RMD. If this sounds like too much work, don't worry. IRA custodians have the responsibility to notify their customers of their RMD amount.
Please don't forget to take your RMD. If you fail to take this distribution, there is this little IRS penalty. The penalty is 50% of the amount that should have been distributed. That's not a misprint—the penalty is 50% of the amount that should have been distributed.
ACTION ITEM: Taxpayers that are required to take an RMD should do so before the end of the year to avoid this outrageous penalty.
Thomas F. Scanlon, CPA, CFP®