RETIREMENT AND PENSION SYSTEMS; INDIVIDUAL RETIREMENT ACCOUNTS;

RETIREMENT AND PENSIONS SYSTEMS;

Federal laws/regulations;

You want to know (1) the maximum age at which a person must start taking distributions from his traditional IRA, (2) whether IRA distributions are taxable and if so, whether they are taxed as ordinary income, (3) the rationale for requiring a person to start taking distribution of his IRA by a specified age. Much of the information in this report is taken from the IRS Publication 590.

SUMMARY

An owner of a traditional IRA must start taking distributions from his IRA by April 1 of the year following the year in which he reaches age 70½. This date is called the required beginning date (RBD). In most cases, IRA distributions are taxed as ordinary income in the year received. We were unable to determine the rationale for the age requirement. But federal law requires that distribution rules for IRAs be similar to the rules for qualified pension, profit-sharing, and stock bonus plans (26. USC408 § (a)(6)). By law, the RBD for such plans is age 70½ (26. USC401 § (a)(9)).

DISTRIBUTION REQUIREMENTS

RBD

In 1974, Congress established the Employee Retirement Income Security Act (P. L. 93-406 § 2002). This act established IRAs and made the RBD the calendar year when the employee attains age 70½. A subsequent amendment made the RBD April 1 of the year following the year in which the employee reaches age 70½.

Minimum Distribution Amount

The IRA owner must take at least a minimum amount for each year starting with his RBD. Even if he begins taking distribution before the RBD, the total taken must be at least equal to the sum of the minimum amounts for each year starting with the RBD.

Minimum distributions are calculated differently depending on whether the investment is an IRA or and Individual Retirement Annuity. For an IRA, the minimum must be calculated each year, while for an Individual Retirement Annuity, special rules apply. To calculate the minimum distribution amount, the IRA account balance (as of the end of the preceding year) is divided by the life expectancy of the owner. The IRS provides life expectancy tables used for calculation purposes. Table III is used for unmarried owners and any owner whose spouse is not more than 10 years younger. Table II is used for owners whose sole beneficiary is a spouse who is more than 10 years younger (Attachment 1).

Penalties

If a person does not take distributions or if distributions are not large enough, he may have to pay a 50% excise tax on the amount not distributed (IRS Publication 590).

WHEN AN IRA DISTRIBUTION IS NOT TAXABLE

If an IRA contains non-deductible contributions, the contribution amount is not taxed, but any earnings derived from that contribution are treated as ordinary income and taxed in the year distributed. A non-deductible contribution is made when either the person’s income or the contribution amount exceeds the maximum allowed as described in the law.

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