Q. I just turned 72 and my IRA administrator informed me that I may need to distribute from my traditional IRA account. I don’t need the money and would rather my account continued to grow tax free. Is there a way to avoid taking a distribution?
A. For 2021, distributions must begin no later than April 1 of the calendar year following the calendar year in which you turn 72.
You can choose to have the full amount distributed to you on or before the required start date or in a series of installments starting on or before the required start date. Payments may be made to you over your life, or over your life and that of your designated beneficiary, or over a period not exceeding your life expectancy or that of you and your designated beneficiary. The Internal Revenue Service provides life expectancy tables for this calculation. Usually, your administrator will provide you with the amount of your minimum distribution required.
Failure to comply with the rules relating to the minimum distributions required may subject you to an excise tax equal to 50% of the minimum distribution required. As you can see, this can be a pretty expensive penalty. However, the excise tax may be refunded if it can be demonstrated that the insufficient distribution was due to a reasonable error and that steps are taken to correct the insufficient distribution. The penalty is reported on Form 5329 (Additional Taxes on Eligible Plans [Including IRAs] and other tax-advantaged accounts).
Tax Planning Note: If you decide to defer your first distribution until April 1, 2022 of the calendar year following the calendar year in which you turn 72, then you will need to receive a second minimum required distribution during the same period. year (2022). In other words, you will double your taxable distributions. These distributions will be taxed at your ordinary income tax rates for federal and state purposes. Another option for you may be to distribute a direct charitable contribution instead of receiving your minimum required distribution. It would be wise to discuss these matters with your tax advisor to best determine when and what type of distributions are most tax-efficient.
Barry Dolowich is a Chartered Accountant and owner of a full service accounting and tax firm with offices in Monterey. He can be reached at 831-372-7200. Please direct questions to Barry at PO Box 710 Monterey, CA 93942-0710 or email: [email protected]
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