Taking RMDs for 2010 and Later
Required minimum distributions are back for 2010 and later years. Congress waived RMDs for 2009 only. You have to take yours by the end of 2010 if you haven’t already and continue taking them in the future.
RMDs are required after age 70½. You must take your first RMD by April 1 of the year after you turn 70½. For example, when you turned 70½ in 2010, you can take the first RMD in 2010 or by April 1, 2011. It’s often best to take that first RMD in the year you turn 70½, because you’ll have to take the second RMD by Dec. 31 of the following year. If you wait to take the first RMD, you’ll have two RMDs in one year. In the example, when you wait until early 2011 to take the first RMD, you’ll have another RMD to take by Dec. 31, 2011. Taking two RMDs in 2011 could push you into a higher tax bracket.
Those who turned 70½ in 2009 were able to skip their first RMDs. They didn’t have to take an RMD by April 1, 2010, but will take an RMD by Dec. 31, 2010. They have to take only one RMD in 2010 and following years.
In the years after you turn 70½, you must take an RMD each year.
There are no required minimum distributions on Roth IRAs, except for beneficiaries.
Computing RMDs
The RMDs are simple to compute. You start with the ending value of the IRA on Dec. 31 of the previous year. When you turn 70½ in 2010, you use the closing value for 2009, even if you wait until early 2011 to take that first RMD. In years after you turn 70½, you use the IRA value at the close of the previous year. Your 2011 RMD uses the IRA value on Dec. 31, 2010.
You use the closing value of 2009 for all 2010 RMDs. We simply skip the 2008 value, because RMDs were suspended for 2009.
The second step is to take your life expectancy. This is found in tables furnished by the IRS in Publication 590, available free on the IRS web site at www.irs.gov. We also provide the most-used table on our web site at www.RetirementWatch.com under the “Extras” tab.
There are three life expectancy tables. Table I is for beneficiaries (those who’ve inherited IRAs). They have to take RMDs over their life expectancies. Table II is restricted to IRA owners who are married, whose spouses are more than 10 years younger than they are, and whose spouses are the sole principal beneficiaries of their IRAs. Every other IRA owner uses Table III, also known as the Uniform Lifetime Table. This is the table on our web site.
To find your RMD for the year, divide the IRA balance at the end of last year by your life expectancy for this year. If you turn 74 in 2010, your life expectancy under Table III is 23.8. If your IRA balance was $150,000, your RMD for 2010 is $6,303.
Using RMD Strategies
You always can take distributions greater than the RMD. You should consider that for 2010 if you anticipate facing higher tax rates in the future. You may find taxes are decreased over the long-term by taking more than required this year. You want to consider the effect of the excess distribution on other parts of the tax return. Higher gross income can lead to reduced itemized deductions and personal or dependent exemptions. It also can trigger the alternative minimum tax, increase the amount of Social Security benefits that is taxed, and cause you to pay higher Medicare Part B premiums in two years. We discussed these issues all year in the context of considering converting a traditional IRA to a Roth IRA.
When you own multiple IRAs, you have flexibility. The RMD for the year is computed by aggregating the balances of all your IRAs and dividing the total by your life expectancy. You can take the resulting RMD from the IRAs in any combination you want. Take it all from one IRA or take different amounts from the IRAs in any ratio you want. This allows you to use the RMD to rebalance your portfolio when it’s out of whack. Take RMDs by selling the investments that have appreciated to too high a percentage of your portfolio.
You might avoid underpayment of estimated tax penalties by having income taxes withheld from your RMD. The IRS considers withheld taxes to be paid in equal amounts over the year. So if you find your estimated tax payments from earlier in the year came up short and are likely to trigger a penalty, have the underpayment withheld from a year-end RMD.
Try to take RMDs early in the year. This ensures the task is not forgotten or left to a last-minute rush when IRA custodians are busy and likely to make mistakes or perform tasks late. Taking the RMD early in the year also ensures there is no problem in case anything should happen to you during the year.
You can make a charitable contribution with an RMD or other IRA distribution. But the special contribution deal for those ages 70½ and older expired at the end of 2009. You have to include the distribution in gross income, and you receive an itemized deduction for the amount donated to charity. Congress might reinstate the special provision at some point, but it hasn’t yet.
RW December 2010.
