c. Required Distributions at Age 70 1/2; Excise Tax
Related Topics:
Required Minimum Distributions
IRA Worksheet For Those on Social Security
An IRA generally must begin making distributions each calendar year beginning after the IRA owner attains age 70 1/2. Thus, after age 70 1/2, IRA owners no longer may make deductible contributions, and must begin paying some of the taxes they have deferred through contribution deductions.
Failure to withdraw during a particular taxable year at least the minimum amount required
by law generally results in the imposition of an excise tax on the IRA owner equalling 50%
of the shortfall between the actual amount withdrawn and the minimum distribution required
by law. 272 If an IRA owner has a good reason for not making the minimum required
distribution, the tax can be avoided, however. For example, if the organization that sold
an IRA to the taxpayer gave incorrect advice or if the taxpayer made a mistake in using,
or did not understand, the excess accumulation formula, he may request that the tax be
excused. To do so, the excise tax must first be paid using form 5329, which is filed along
with the Form 1040 or 1040A for the year. The taxpayer attaches an explanation for the
failure to withdraw the minimum required distribution, showing when the minimum amount
actually came out or what he has done that will result in its coming out of the IRA. If
the IRS approves the request, the IRA owner receives a refund of the excise tax paid. 273
/Footnote/ 272 §4974(a), discussed at ¶5550. In some circumstances the IRS is authorized
to waive the tax. See §4974(d).
/Footnote/ 273 Instructions to Form 5329; IRS Pub. 590, "Individual Retirement
Arrangements (IRAs)."
Note: The minimum distribution rules will not be considered violated, and the excise tax
will not apply, if any portion of the IRA owner's benefit is not distributed where the
IRA's assets include an annuity or guaranteed investment contract for which payments have
been reduced or suspended pursuant to a state proceeding concerning the delinquency of an
insurance company. 274
/Footnote/ 274 Rev. Proc. 92-10, 1992-1 C.B. 661, clarified by Rev. Proc. 95-52, 1995-2
C.B. 439.
WAIVER OF PENALTY
(d) Waiver Of Tax In Certain Cases
If the taxpayer establishes to the satisfaction of the Secretary that--
4974(d)(1) the shortfall described in subsection (a) in the amount distributed during any
taxable year was due to reasonable error, and
4974(d)(2) reasonable steps are being taken to remedy the shortfall, the Secretary may
waive the tax imposed by subsection (a) for the taxable year.
(Added Pub. L. 93-406, title II, 2002(e), Sept. 2, 1974, 88 Stat. 967, and amended Pub. L.
94-455, title XIX, 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834; Pub. L. 95-600, title I,
157(i)(1), Nov. 6, 1978, 92 Stat. 2808; Pub. L. 99-514, title XI, 1121(a)(1), title XVIII,
1852(a)(7)(B), (C), Oct. 22, 1986, 100 Stat. 2464, 2866.)
The IRA owner need not take a full distribution of his interest at age 70 1/2. Instead a gradual schedule is permitted. Complicated rules prescribe the slowest acceptable payout schedule. 275 The rules generally are the same as those applicable to qualified plans, except that, in lieu of an employee's balance in his qualified plan as of the latest valuation date, the IRA rules use the value of an individual's IRA as of the close of business on December 31 of the calendar year preceding the calendar year for which a minimum required distribution is to be made. 276 Also, the IRA rules are applied without regard to when the IRA owner retires. This is not the case with respect to non-5% owners who participate in a qualified employer-sponsored retirement plan.
/Footnote/ 275 §408(a)(6) (individual retirement accounts), §408(b)(3) (individual
retirement annuities); Prop. Regs. §1.408-8.
/Footnote/ 276 Prop. Regs. §1.408-8, A-5. But see PLR 9011031 (Minimum distribution
required from IRA for calendar year under §408(a)(6) cannot be based on amount in
taxpayer's IRA account after distribution of one-half of IRA's value to taxpayer's former
spouse as required by a qualified domestic relations order; rather, it must be based on
IRA's value before the distribution to the former spouse).
In certain respects, the minimum distribution rules for qualified plans and those for
IRAs differ. The rules for qualified plans are discussed at ¶5550. The remainder of this
section discusses the differences applicable to IRAs.
The IRS, at one time, required an IRA owner having more than one IRA to calculate a
minimum distribution with respect to each IRA and actually pay a minimum distribution from
each IRA annually. 277 By administrative pronouncement that rule has been changed.
Although an IRA owner still must calculate a minimum required distribution separately for
each IRA, these amounts may be totalled and the total distribution taken from any one or
more of the individual's IRAs. Hence, an IRA owner may satisfy the minimum distribution
requirement by taking from one IRA the amount required to satisfy the minimum distribution
requirement for other IRAs. 278
/Footnote/ 277 Prop. Regs. §1.408-8, A-1.
/Footnote/ 278 Notice 88-38, 1988-1 C.B. 524.
Example—Application of the Minimum Distribution Requirement Where Taxpayer Maintains Multiple IRAs
X, born July 15, 1923, has three IRAs. He turned age 70 1/2 on Jan. 15, 1994, making his
required beginning date Apr. 1, 1995. On Dec. 31, 1993, the account balance of IRA-1, a
conduit IRA holding a distribution rolled over from a pension plan, was $100,000. The
balance of IRA-2 was $10,000. The balance of IRA-3 was $1,000. The beneficiary of IRA-1 is
X's brother, whose age as of his birthday in 1994 was 61. The beneficiary of IRA-2 is X's
wife whose age as of her birthday in 1994 is 80. The beneficiary of IRA-3 is X's mother,
whose age as of her birthday in 1994 is 90. On these facts, the following results apply:
the minimum required distribution from IRA-1 is $3,952.57 ($100,000 divided by 25.3, the
joint life and last survivor expectancy of X and his brother). The minimum required
distribution from IRA-2 is $588.24 ($10,000 divided by 17.0, the joint life and last
survivor expectancy of X and his spouse). The amount of the minimum required distribution
from IRA-3 is $63.29 ($1,000 divided by 15.8, the joint life and last survivor expectancy
of X and his mother). The total required distribution that must be withdrawn from any one
or more of X's accounts by Apr. 1, 1995, is $4,604.10, the sum of the minimum required
distributions from the three IRAs.
On Apr. 1, 1995, X withdraws $1,000 from IRA-3 and $3,604.10 from IRA-2. X withdraws
nothing from IRA-1. X has met his distribution requirements with respect to all three IRAs
for the 1994 distribution calendar year. In determining the Dec. 31, 1994, balances used
in calculating minimum required distributions for IRAs 2 and 3 for 1995, the amount
actually distributed from each IRA on Apr. 1, 1995 is subtracted from the Dec. 31, 1994
account balance of such IRA. 279
/Footnote/ 279 Prop. Regs. §1.408-8, A-5.
The transition rule provided in the rules for qualified plans for individuals attaining
age 70 1/2 before January 1, 1988 does not apply to IRAs. The minimum required
distribution rules apply to all IRA owners regardless of when they attained age 70 1/2.
280
/Footnote/ 280 Prop. Regs. §1.408-8, A-3. Certain transition rules apply
to an individual who attained age 70 1/2 in 1986 or before, was alive on Dec. 31, 1987.
Prop. Regs. §1.408-8, B-1, B-2, B-3, and B-4.
As with qualified plans, an IRA does not lose its tax-exempt status as a
result of isolated instances of failing in operation to make minimum required
distributions. (Instead the excise tax on failure to make required distributions would
apply.) A pattern or regular practice of failing to make such distributions could cause
loss of tax-exempt status, however. 281
/Footnote/ 281 Prop. Regs. §1.408-8, A-3A.
Individuals who came into ownership of their IRA as beneficiaries upon the death of a
previous IRA owner before January 1, 1984, continue to be treated as owners of such IRAs
for purposes of the minimum required distribution rules. 282 In other words, the
after-death rules would not apply to the IRA even though the previous owner has died, but
the age 70 1/2 rules apply to the IRA with respect to the new owner and the after-death
rules apply to the IRA after the death of the new owner.
/Footnote/ 282 Prop. Regs. §1.408-8, A-4. Inherited IRAs (now prohibited
except for surviving spouses), are discussed below.
The minimum required distribution rules contain special procedures for
accounts from which, or into which, a rollover is made or from which, or into which, a
direct transfer (from another trustee, custodian or insurance company) is made. IRAs are
subject to the same basic rules. 283 The IRA rules make clear however that a qualified
plan, annuity plan, or tax-sheltered annuity cannot make a direct transfer into an IRA
unless the transfer is made at the IRA owner's direction (or at the direction of his
surviving spouse) and the transfer would otherwise be eligible to be treated as a rollover
contribution. 284 A transfer that does not satisfy those requirements may adversely affect
the qualified status of the plan from which the transfer is made and the qualified status
of the IRA receiving the transfer. 285
/Footnote/ 283 Prop. Regs. §1.408-8, A-6, A-7, A-8.
/Footnote/ 284 The rules for rollover contributions into IRAs of distributions from such
plans are discussed at ¶5610.03.E.4, below.
/Footnote/ 285 Prop. Regs. §1.408-8, A-8.
Transition rules are provided for 1985, 1986 and 1987 minimum required distributions. 286
/Footnote/ 286 Prop. Regs. §1.408-8, B-1, B-2, B-3, B-4.
The incidental death benefit rules promulgated by the regulations (the MDIB rules) apply
to IRAs for calendar years after 1988. 287
/Footnote/ 287 Prop. Regs. §1.408-8, B-13. Unlike qualified plans, IRAs were not subject
to the incidental death benefit rules before 1989. Note, however, that Roth IRAs,
discussed at ¶5610.08, below, are not subject to the MDIB rules. See §408A(a)(4)-(5).