The Rules of IRA Distribution

In most states, when you become 70 and a half, the April following is the day you must start withdrawing money from your IRA. IRA stands for Individual Retirement Account. This is the savings account where you have been storing money in hopes of a work-free retirement stage at the end of your life. When you children have moved out, it’s the perfect time to establish a summer home, travel, or just relax on your porch with all the books you’ve always wanted to read. When you need to start pulling your money out of your IRA account, you need to consider calculating a required minimum distribution.

In order to find your required minimum distribution, you need to take the year-value of your IRA account and divide it by a life expectancy divisor. The resulting number is the amount of money you should take out of your IRA for the year. You can also take out more money than required if this suits you, but you absolutely must take out the minimum. You can recalculate your life expectancy based on your health and wellbeing to determine your IRA withdrawals every year. Almost every retired person uses this table to calculate their withdrawals. The only exception is in marriages where one spouse is 10 years older than the other. These couples use a different table that will make the distributions smaller.

The best thing about an IRA is that it provides tax-deferred growth on the money. You don’t have to pay income tax on the money in the account until it is withdrawn. Therefore, if you don’t use all of the money in the IRA, you can let it accumulate, tax-deferred, until it is distributed in the future. While you are alive, the minimum distributions will be based on your life expectancy, and who you name as the beneficiary of your account has no effect on that account. Yet when you pass away, the distributions in the account are now based on you beneficiary’s life expectancy. It is very important that you name a beneficiary before you pass away, or else the IRA will be determined using your age at the time of death.

Once you have a beneficiary named, the IRA will use his or her life expectancy as the determining factor for minimum withdrawals. You can change this beneficiary to someone younger, if you please, in order to obtain more tax-deferred growth on the money. Once you pass away, the court will need to determine your final beneficiaries for the IRA account. You can list these people in your will, or bind it in some other legal document. The final beneficiaries don’t actually need to be declared until the September 30th after your date of death. The final beneficiaries must be chosen from the list of both primary and contingent beneficiaries, unless an heir like a spouse choses to do a roll-over. In many cases, the younger the heir of your IRA is the better.

If you chose a non-spouse beneficiary to take hold of the IRA, then he or she will also be able to continue tax-deferred growth as the money accumulates. This is different from a spouse rollover, in which the spouse names additional beneficiaries so that he or she can get a maximum stretch out on the account. While the rules for an IRA have been simplified, they can still be costly and complicated. Without help, you may end up in a tight spot and not be sure how to maximize your IRA account. Planning for the future of this money is essential, and you should talk to a probate attorney in order to get help preparing for the IRA account at inheritance.