Thursday, October 21, 2010

They're Baaaack......

In response to the drastic stock market decline in 2008, Congress (as part of the Worker, Retiree, and Employer Recovery Act of 2008) suspended required minimum distributions (RMDs) from IRAs and defined contribution employer plans for the 2009 calendar year.  As a result, individuals could avoid having to deplete retirement assets while the value of those assets was suddenly depressed.  But RMDs are back as of January 1, 2010.  If you’re out of practice – or making a required distribution from your IRA for the first time – here’s what you need to know:

When Do RMDs Have To Be Taken?
According to IRS regulations, people aged 70 ½ and older must take their distributions by December 31 of each year, or when they separate from the employer sponsoring their retirement plan, whichever is later.  There is one exception – if you turned 70 ½ in 2010 (and you are retired) you can wait until April 1, 2011 to take your first RMD.  It is important to note, though, that the RMD taken is for the 2010 calendar year – you will still have to take the RMD for 2011 by December 31, 2011, thus creating two distributions for 2011.

How Much Do You Have To Take?
Distributions are calculated by IRS rules, so you have to adhere to a very specific formula.  Your 2010 distribution will be based on your retirement account’s value on December 31, 2009 and one of three IRS tables found in Appendix C of IRS Publication 590.  Essentially, you are dividing your IRA balance by what the IRS has determined your life expectancy to be, depending on which table you are using.    If an individual has several IRAs, they can generally add the balances together and take the required distribution from just one account.  This is not true for 401(k) and 403(b) plans.  If an individual has money in several plans from previous employers, distributions must be taken from each plan – a good reason to combine them into a single IRA.  If you are unsure which table applies to your situation please contact your tax professional or MTR Financial Services for guidance.  It is important to remember that these calculations only determine your required distribution – you can always take more than the required distribution if you wish.

Consider The Taxation of Distributions
The money taken from your retirement account is taxed as ordinary income in the year taken because you received a tax deduction when you contributed to it.  With income tax rates widely expected to increase in 2011, the timing and amount of distributions you take need to be closely monitored.  If you did turn 70 ½ in 2010, it may make sense to take your first RMD in 2010 rather than deferring it to April 1 of next year.

Who Else Is Required To Take Distributions?
If you inherit an IRA (either a traditional or Roth) or employer-plan account from someone other than your spouse, you must begin taking RMDs over your life expectancy, starting with the year following the year of the account owner’s death.  (Spousal beneficiaries can simply roll the inherited account into their own IRA, and will not be required to take distributions until age 70 ½.)  Therefore, if you inherit an IRA from a parent, for example, and you are only 50 years old, you will be required to take annual distributions from that account each year for as long as you live.

Still Not Sure?
If you are still not sure if you have to make a required distribution by December 31, 2010 please consult your tax professional or MTR Financial Services for clarification.  The penalties for not taking the required minimum distribution, or any distribution at all, are severe.  You will be taxed 50% of the amount that you should have taken but did not.  That is a pretty stiff penalty that you will want to avoid!

Monday, October 4, 2010

Study on Lottery Players

A recent study conducted by Cornell University reports that lottery players who earn $13k per year spend an average of $1,100 of their income per year on tickets. They contribute 82% of all lottery revenue!  That is a very sad and scary statistic.  The lottery is simply a tax on the poor, in my opinion.