Tuesday, June 21, 2011

Were You 70 1/2 in 2010?

An important date is coming up if you turned age 70 ½ last year and decided to defer your first IRA withdrawal.

Example: A taxpayer born February 9, 1940 attained 70 ½ in 2010. A taxpayer born August 1, 1940 will attain age 70 ½ in 2011.

By April 1, 2011 a taxpayer who reached age 70 ½ last year must begin minimum required distributions from his/her IRA.

The taxpayer does not have to begin MRD is he/she is still employed and has a 401(k) at work. The initial date is delayed until such taxpayer retires. This exception does not apply to a 5%-or-more owner, however. He/she must begin MRDs at age 70 ½ whether or not he/she continues working.

To calculate the MRD from an IRA or several IRAs, the taxpayer would combine the balances in all IRA(s) to make the calculation. The MRD can be made from one or a combination of IRAs, however. Each IRA does not have to have an MRD, as long as the total from all IRAs equal the MRD.

The rule is different for qualified plans, such as 401(k)s. Each qualified plan must have its own MRD, which is the opposite of the IRA rule.

There is a steep 50% penalty for failure to take out MRDs. The penalty fortunately can be waived for reasonable cause and reasonable steps are being taken to remedy the failure. Still, one would prefer not to go there.

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