John Bullis: A half year makes a big tax difference
May 19, 2014
Our tax law is complicated. Some folks are wondering about the timing of taking the required minimum distributions from IRA accounts.
If the required minimum distribution is not taken as required, then there can be a penalty of 50 percent (is titled as an excise tax) of the amount that should have been taken. However, IRS is not as hard to deal with as a lot of folks think. We have been able to have the penalty waived or canceled in several instances. We just need to explain the facts of the situation and request the penalty not be charged.
The year you turn 70½ years old is the starting point. If you are 70 years old before June 30, then you will be 70½ years old at Dec. 31. The first RMD is for the year you are 70½ years old on Dec. 31. That can be paid to you in the year you become age 70½ or by April 1 of the following year. If you choose to delay taking that first RMD until, say March 31 of the year following the year you are 70½, you must also receive another RMD by Dec. 31 of that year.
For example, if you turn 70½ in 2014, you must take the RMD by April 1, 2015, for the year 2014 and also take another RMD (for 2015) by Dec. 31, 2015. That is not the end of the world, you will just be reporting two RMDs in 2015. If your income will be fairly high in 2014 and lower in 2015, that choice might save some income tax.
As you probably know, the amount of the RMD is a special calculation. Take the total balance in the IRA at the previous Dec. 31 and divide it by the IRS table “life expectancy” amount for that year. If the Dec. 31, 2013, IRA balance is $100,000 and you are age 70½ in 2014, divide that balance by 27.4 to figure the RMD for that year. So the RMD in that case would be $3,649.64. (100,000/27.4).
We usually suggest the RMD be rounded up a bit. In the example above, we would suggest at least $3,650 be done. You might note the first RMD is less than 4 percent of the prior Dec. 31 balance. That means if the IRA account had 4 percent earnings, the balance in the account after the first RMD would grow a bit.
The IRA custodian may give you the RMD in their statements. You might look for that information and note when you have taken the required amount for that year.
Why age 70½ is in the law? Only Congress can tell. It was probably some sort of a compromise, but it does complicate things a little more than if age 70 or 71 was used.
Did you hear? “The happiest people don’t necessarily have the best of everything. They just make the best of everything.”
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.