IRA Distribution

Required Minimum Distribution

When we reach the age of 70 and 1/2 the internal revenue service requires us to begin to take what is known as a required minimum distribution from our IRA. Up to this point we have avoided paying taxes on this money. The government says it is now time to begin to take a Ira Manditory Distribution.

If we fail to start taking these required minimum distributions, then we are subject to a very large penalty of 50 percent. An example would be that if your required minimum distribution for a year is $1500, and you fail to take it, you would be subject to a 50 per cent penalty on the $1500 resulting in a $750 tax liability.

The view of the government is that they have provided the individual with a benefit in allowing him or her to make tax deferred contributions to assist them in building a solid financial future for their retirement years.

At age 70 and 1/2 the government wants to start collecting some of those taxes. We determine the amount of our IRA Manditory Distribution by using a life expectancy table provided by the government.

There are 3 separate tables, the most common one used is the uniform lifetime table. The table predicts your life expectancy based on your current age. You determine your distribution amount by dividing the number of years of life expectancy into the dollar value of the ira.

Most of us, while working, participated in a tax deferred 401k savings plan with our employer. This was a great benefit to us as our tax liability is usually lower in retirement than when we are working. Normally upon retirement we will rollover 100 per cent of our 401k to our IRA, as it is considered to be a non-taxable event.

These 401k dollars increase the value of our IRA, which will in turn increase the amount of our IRA Manditory Distribution that we take. A nice feature of our required minimum distribution is that we can take it in installments throughout the year, rather than taking it as one single distribution.

The government did give us a break in 2009 due to the poor market conditions. They have waived for 2009 only the requirement to take a IRA Manditory Distribution. There can be another instance when we are allowed to avoid taking required minimum distribution. That would be a case where we give the full annual amount to an eligible charity.

Your required minimum distribution is transferred to the eligible charity. Overall the ownership of an IRA can very positively influence the financial portion of our retirement. It provides many benefits and opportunities for us and our loved ones to enjoy in our retirement years.