Beginning in the year you turn 70 1/2, the Internal Revenue Service mandates that you start removing money from your individual retirement accounts. If you have multiple IRAs, perhaps from diversifying your investments, you need to know how to calculate your minimum required distributions and how you must take them.
Only tax-deferred IRAs require minimum distributions. Tax-deferred IRAs refer to any IRA that accepts tax-deductible contributions, such as traditional IRAs, SEP IRAs and SIMPLE IRAs. Roth IRA accounts, on the other hand, do not require minimum distributions. For example, if you have two traditional IRAs and one Roth IRA, you must take minimum distributions from the two traditional IRAs but not the Roth IRA. Additionally, if you have a Roth IRA, you cannot count distributions taken from the Roth IRA as part of your required minimum distribution.
Calculating the Required Amount
When you have multiple IRAs requiring minimum distributions, the IRS requires that you calculate the minimum required distribution from each account separately. First, you need to figure your life expectancy using the IRS life-expectancy tables in IRS Publication 590. Next, look up (or call your financial institution to find) the value of each account at the end of the previous year. For example, your 2014 minimum required distribution is based on the IRA value at the end of 2013. Finally, divide the account value by your life expectancy to find the required minimum distribution.
Taking the Distributions
In the year that you turn 70 1/2 years old, you have until April 1 of the following year to take your distribution. In all other years, you have to take the full amount by Dec. 31. Though the IRS requires that you calculate the amount separately, it allows you to total the minimum distribution amounts and divide it between your tax-deferred IRAs in any way you choose. For example, if your first traditional IRA required a $4,000 minimum distribution and your second traditional IRA required a $7,000 minimum distribution, you could divide the $11,000 minimum distribution however you wanted between the two accounts. For instance, you might take $11,000 from the first IRA or $11,000 from the second IRA or $5,500 from each IRA.
Penalties for Not Withdrawing
If you do not take out the minimum required amount, the IRS charges you a 50 percent penalty at the time you file your income taxes. The penalty applies to the unwithdrawn amount. For example, if your minimum required distribution from your IRAs was $11,000 and you did not take out anything, you would owe a $5,500 tax penalty. If you took out only $6,000, you would owe a $2,500 tax penalty. The IRS does not limit the amount you can withdraw, so if you want to exceed the minimum required distribution, the IRS does not penalize you.
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