Show #334 Airing SUnday, 3/26/06
Maybe you can fool your friends about your age, but you’d better not play games with Uncle Sam! He’s watching and once you turn age 70-1/2, the law requires you to start taking money from your retirement accounts or face high fines. And the requirements for withdrawals from annuities have just changed. Here to explain how to play by the rules and avoid costly penalties is the age-defying Tony Mercuri from Ta-Check Tax Service.
Question: Let's start with the basics. What is a Required Minimum Distribution?
Answer: When you turn 70 ½, the IRS requires that you begin taking distributions from all of your qualified accounts. These accounts include IRAs, 401(k)s, 403(b)s, basically all of your retirement accounts.
This distribution must be taken by April 15th the year after you turn 70 ½. So if you turn 70 ½ this year, the distribution must be taken by April 15, 2007.
Question: Now much money do you have to take out?
Answer: Answer: The government uses a complicated formula based on your life expectancy. But your life expectancy changes every year. So if you have to start withdrawals this year, your life expectancy is 27.4 years. Next year though, it’s not one year less, because life expectancy changes constantly. This year your life expectancy is 27.4 years. Next year your life expectancy is 26.5 years. The government puts out a table to make it easier. If your viewers call, I’d be happy to send out a copy of the table.
This number progressively gets larger as you age, as the goal is to eventually force all of your money out of the qualified plans so the IRS can collect taxes on the distribution.
Question: What happens if you're over 70 ½ and you don't take a distribution?
Answer: The government charges a penalty of 50% of the amount you were supposed to take out. So if you were to take $1,000, the penalty is $500. That’s huge!
Question: What if you have different retirement accounts?
Answer: You add up the total and you have to withdraw the amount based on the table we discussed. But you can decide where to take the money from. You can take it all from one account, or something from each account.
Question: Have there been any recent changes to these rules that we need to know about?
Answer: Yes. Several years ago they made some sweeping changes to how this was done. In the past, the owner was able to pick from several distribution options based on who the beneficiary was. This got rather confusing, so they simplified it and came out with one uniformed table that everyone can use.
Recently, they made a big change for people who have annuities in their qualified plans.
Question: What is this change?
Answer: Many annuities have death benefits. These death benefits guarantee that the beneficiary will get a certain amount of money when the owner passes away. Many of these variable annuities have death benefits that are worth more then the current value of the annuity.
In this case under the new rules, the owner's Required Minimum Distribution is not based on the annuity value. Instead, it is based on the death benefit.
Let me give an example: if you have an Annuity IRA with a current value of $80,000, and a death benefit of $120,000, your required minimum distributions are now based on the $120,000. This will force more money out of the annuity and cause more taxable income. Also, if you are not aware of this and calculate your distribution incorrectly and do not take out enough, the IRS can penalize you 50%.
If you're blowing out 70 candles on your birthday cake, you don't want to blow off the minimum distribution or withdrawal rules. You could face high fines if you don't understand the fine points of the law. For more information, or for the government's life expectancy table, give Ta-Check a call.
