The terms of an independent retirement account or annuity must include several minimum distribution rules, which Congress imposed to ensure that IRAs are primarily used as retirement savings media, not as vehicles to build wealth for transmission to heirs. As discussed below, these rules provide separately for distributions to IRA owners and distributions to beneficiaries after the death of an IRA owner. An IRA owner is an individual who establishes and contributes to an IRA for the benefit of himself or herself and his or her beneficiaries.
Minimum distributions to IRA owners
An IRA must, by its terms, require the account or annuity to be fully distributed not later than April 1 of the year following the calendar year during which the IRA owner attains age 70 and 1/2 or be distributed by annual or more frequent payments over a period beginning by that date and continuing not longer than for the owner's life, the lives of the owner and his or her beneficiary, or a period not longer than the life expectancy of the owner or the owner and beneficiary. April 1 of the year following the calendar year during which the owner reaches age 70 and 1/2 is the required beginning date.
How do I determine what the minimum annual distribution for a Traditional IRA should be?
The annual minimum distribution to an IRA owner under an IRA is determined by rules for defined contribution plans and under an individual retirement annuity by rules for defined benefit plans. Under the former, the minimum distribution for a “distribution calendar year” is the owner's “account” for the year, divided by an “applicable distribution period.” An owner's distribution calendar years are the years during which he or she reaches age 70 1/2 and each subsequent year during his or her life. The account for a distribution calendar year is its value as of end of the preceding calendar year. The “applicable distribution period” changes annually and is usually taken from a Uniform Lifetime Table. It is, for example, 27.4 for the distribution calendar year during which an owner reaches age 70, 18.7 for the year of his or her eightieth birthday, and 11.4 for the year during which an owner turns 90. The minimum distribution for the first distribution calendar year must be made by April 1 of the following year (the required beginning date), and distributions for the distribution calendar year containing the required beginning date and all other years must be made by the end of the year. The minimum distribution for a year is not reduced by distributions for earlier years in excess of the minimums for those years.
For example, assume Joe, who was born on September 1, 1935, and is unmarried, has an IRA with a balance of $265,000 at the end of 2008 and $268,472 at the end of 2009. Since Joe reaches age 70 1/2 on March 1, 2009, her required beginning date is April 1, 2010, and her first distribution calendar year is 2009. The minimum distribution for 2009 is $10,000, which is $265,000 (the account at the end of 2008) divided by 26.5 (the applicable distribution period for a distribution calendar year during which an owner turns 71). This amount must be distributed to Joe not later than April 1, 2010. The minimum distribution for 2010 is $10,500, computed as the account balance at the end of 2009 ($268,472), divided by the applicable distribution period for a 72-year-old (25.6); it must be distributed not later than December 31, 2010.
What do I need to report when making a minimum IRA distribution?
Trustees, custodians, and issuers of IRAs (trustees) must make reports on minimum distributions to IRA owners and the IRS. If a minimum IRA distribution is required for a calendar year as of the beginning of which the IRA owner (or a surviving spouse who has elected to be treated as owner) is alive, the trustee holding the IRA as of December 31 of the preceding year must provide a statement to the owner by January 31 of the distribution year. The statement must indicate that a minimum distribution is required for the year, state the date by which the distribution must be made, and either state the amount of the distribution (calculated assuming that the sole beneficiary of the IRA is not a spouse more than 10 years younger than the IRA owner) or offer to compute the amount. The statement must also inform the owner that this information will be provided to the IRS. A trustee must also file Form 5498 (IRA Contribution Information) with the IRS for each calendar year for which a minimum distribution is required. This form need not state the amount of the minimum distribution.
No reporting to beneficiaries or the IRS is required with respect to IRAs of deceased owners. Also, although the minimum distribution rules for IRAs generally apply to Internal Revenue Code Section 403(b) contracts, no reporting is required with respect to such a contract, whether the employee is living or dead.
Minimum distributions must be determined separately for each IRA. If an individual is owner of more than one IRA, however, the sum of the minimum distributions from all of them may be satisfied by distributions from any of them. This aggregation rule generally applies only to IRA owners. It does not allow an IRA held as beneficiary to be combined with other IRAs, whether held as owner or as beneficiary. However, two or more IRAs held as beneficiary of the same decedent may be aggregated if minimum distributions are being determined under the same life expectancy rule. IRA distributions cannot satisfy distributions under Internal Revenue Code Section 403(b) contracts and vice versa. Also, distributions from Roth IRAs cannot satisfy minimum distribution obligations under a traditional IRA or an Internal Revenue Code Section 403(b) contract.